UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 _____________________________________________

Form 10-Q

 _____________________________________________

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2021

Or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 000-27038

 _____________________________________________

NUANCE COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

 _____________________________________________

DE		94-3156479
(State or Other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1 Wayside Road
Burlington,	MA	01803
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(781) 565-5000

 _____________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.001	NUAN	Nasdaq Stock Market LLC

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer," “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-accelerated Filer	☐	Smaller Reporting Company	☐
		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.      ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares of the Registrant’s Common Stock, outstanding as of April 30, 2021 was 286,071,824.

NUANCE COMMUNICATIONS, INC.

TABLE OF CONTENTS

 

		Page
PART I: FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
	Consolidated Statements of Operations for the three and six months ended March 31, 2021 and 2020	1
	Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended March 31, 2021 and 2020	2
	Consolidated Balance Sheets at March 31, 2021 and September 30, 2020	3
	Consolidated Statements of Stockholders’ Equity for the three and six months ended March 31, 2021 and 2020	4
	Consolidated Statements of Cash Flows for the six months ended March 31, 2021 and 2020	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	50
Item 4.	Controls and Procedures	51
PART II: OTHER INFORMATION
Item 1.	Legal Proceedings	51
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
Item 3.	Defaults Upon Senior Securities	53
Item 4.	Mine Safety Disclosures	53
Item 5.	Other Information	53
Item 6.	Exhibits	53
Exhibit Index		54
Signatures		55
Certifications

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
	(Unaudited)
	(In thousands, except per share amounts)
Revenues:
Hosting and professional services	$	197,981	$	182,147	$	393,813	$	356,068
Product and licensing	85,810		69,563		171,847		194,578
Maintenance and support	63,186		64,214		127,070		126,787
Total revenues	346,977		315,924		692,730		677,433
Cost of revenues:
Hosting and professional services	105,977		100,391		211,592		201,721
Product and licensing	8,460		9,089		22,875		43,033
Maintenance and support	7,273		8,020		14,759		15,883
Amortization of intangible assets	4,929		6,557		9,191		13,126
Total cost of revenues	126,639		124,057		258,417		273,763
Gross profit	220,338		191,867		434,313		403,670
Operating expenses:
Research and development	59,500		56,091		115,957		110,696
Sales and marketing	70,333		70,174		135,738		135,950
General and administrative	35,751		38,024		76,896		76,358
Amortization of intangible assets	10,754		8,530		21,285		17,719
Acquisition-related costs, net	1,669		1,678		1,994		2,898
Restructuring and other charges, net	2,479		6,176		11,045		12,859
Total operating expenses	180,486		180,673		362,915		356,480
Income from operations	39,852		11,194		71,398		47,190
Other income (expense):
Interest income	176		1,512		404		3,698
Interest expense	(23,054)		(23,629)		(46,068)		(47,444)
Other income (expense), net	583		(1,688)		1,080		(13,728)
Income (loss) before income taxes	17,557		(12,611)		26,814		(10,284)
Provision (benefit) for income taxes	4,823		13,872		7,126		(27,425)
Net income (loss) from continuing operations	12,734		(26,483)		19,688		17,141
Net (loss) income from discontinued operations	(16,368)		6,477		(8,427)		11,538
Net (loss) income	$	(3,634)	$	(20,006)	$	11,261	$	28,679
Net income (loss) per common share - basic:
Continuing operations	$	0.04	$	(0.09)	$	0.07	$	0.06
Discontinued operations	(0.05)		0.02		(0.03)		0.04
Total net (loss) income per basic common share	$	(0.01)	$	(0.07)	$	0.04	$	0.10
Net income (loss) per common share - diluted:
Continuing operations	$	0.04	$	(0.09)	$	0.06	$	0.06
Discontinued operations	(0.05)		0.02		(0.03)		0.04
Total net (loss) income per diluted common share	$	(0.01)	$	(0.07)	$	0.03	$	0.10
Weighted average common shares outstanding:
Basic	285,284		282,576		284,545		283,366
Diluted	320,112		282,576		317,160		288,214

See accompanying notes.

1

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
	(Unaudited)
	(In thousands)
Net (loss) income	$	(3,634)	$	(20,006)	$	11,261	$	28,679
Other comprehensive (loss) income:
Foreign currency translation adjustment	(5,679)		(15,538)		10,135		(11,114)
Cerence Spin-off	—		—		—		12,331
Pension adjustments	(414)		—		(400)		2,007
Unrealized loss on marketable securities	(1)		(496)		(30)		(528)
Total other comprehensive (loss) income, net	(6,094)		(16,034)		9,705		2,696
Comprehensive (loss) income	$	(9,728)	$	(36,040)	$	20,966	$	31,375

See accompanying notes.

2

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED BALANCE SHEETS 

	March 31, 2021		September 30, 2020
	(Unaudited)
	(In thousands, except per share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	342,851	$	301,233
Marketable securities	69,549		71,114
Accounts receivable, less allowances for doubtful accounts of $9,937 and $8,649	187,649		175,583
Prepaid expenses and other current assets	182,582		152,563
Current assets, discontinued operations	—		35,492
Total current assets	782,631		735,985
Marketable securities	2,000		—
Land, building and equipment, net	143,448		137,299
Goodwill	2,154,443		2,120,495
Intangible assets, net	157,149		167,270
Right-of-use assets	95,925		104,839
Other assets	258,480		248,414
Long-term assets, discontinued operations	—		79,030
Total assets	$	3,594,076	$	3,593,332
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,065,183	$	432,209
Contingent and deferred acquisition payments	3,535		4,224
Accounts payable	77,160		71,833
Accrued expenses and other current liabilities	182,830		199,254
Deferred revenue	257,677		249,484
Current liabilities, discontinued operations	—		29,138
Total current liabilities	1,586,385		986,142
Long-term debt	494,299		1,104,464
Deferred revenue, net of current portion	100,071		98,696
Deferred tax liabilities	13,211		70,116
Operating lease liabilities	95,497		103,996
Other liabilities	81,428		64,597
Long-term liabilities, discontinued operations	—		21,388
Total liabilities	2,370,891		2,449,399
Commitments and contingencies (Note 15)
Mezzanine Equity	101,333		—
Stockholders’ equity:
Common stock, $0.001 par value per share; 560,000 shares authorized; 289,248 and 286,703 shares issued and 285,497 and 282,952 shares outstanding, respectively	289		287
Additional paid-in capital	1,507,519		1,550,568
Treasury stock, at cost (3,751 shares)	(16,788)		(16,788)
Accumulated other comprehensive loss	(108,213)		(117,918)
Accumulated deficit	(260,955)		(272,216)
Total stockholders’ equity	1,121,852		1,143,933
Total liabilities and stockholders’ equity	$	3,594,076	$	3,593,332

See accompanying notes.

3

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

For the three months ended March 31, 2021

	Common Stock			Additional Paid-In Capital		Treasury Stock			Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount				Shares	Amount
	(In thousands)
Balance at December 31, 2020	288,669	$	289	$	1,528,975	(3,751)	$	(16,788)	$	(102,119)	$	(257,321)	$	1,153,036
Issuance of common stock under employee stock plans	645	1		8,367		—	—		—		—		8,368
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(66)	(1)		(3,071)		—	—		—		—		(3,072)
Stock-based compensation	—	—		21,238		—	—		—		—		21,238
Equity portion of convertible debt puttable	—	—		(47,990)		—	—		—		—		(47,990)
Net loss	—	—		—		—	—		—		(3,634)		(3,634)
Other comprehensive loss	—	—		—		—	—		(6,094)		—		(6,094)
Balance at March 31, 2021	289,248	$	289	$	1,507,519	(3,751)	$	(16,788)	$	(108,213)	$	(260,955)	$	1,121,852

For the six months ended March 31, 2021

	Common Stock			Additional Paid-In Capital		Treasury Stock			Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Stockholders' Equity
	Shares	Amount				Shares	Amount
	(In thousands)
Balance at September 30, 2020	286,703	$	287	$	1,550,568	(3,751)	$	(16,788)	$	(117,918)	$	(272,216)	$	1,143,933
Issuance of common stock under employee stock plans	3,762	4		8,364		—	—		—		—		8,368
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(1,217)	(2)		(46,773)		—	—		—		—		(46,775)
Stock-based compensation	—	—		96,693		—	—		—		—		96,693
Equity portion of convertible debt puttable	—	—		(101,333)		—	—		—		—		(101,333)
Net income	—	—		—		—	—		—		11,261		11,261
Other comprehensive income	—	—		—		—	—		9,705		—		9,705
Balance at March 31, 2021	289,248	$	289	$	1,507,519	(3,751)	$	(16,788)	$	(108,213)	$	(260,955)	$	1,121,852

4

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

For the three months ended March 31, 2020

	Common Stock			Additional Paid-In Capital		Treasury Stock			Accumulated Other Comprehensive Loss		Accumulated Deficit		Noncontrolling Interests		Total Stockholders' Equity
	Shares	Amount				Shares	Amount
	(In thousands)
Balance at December 31, 2019	287,626	$	288	$	1,615,989	3,751	$	(16,788)	$	(114,043)	$	(244,927)	$	—	$	1,240,519
Issuance of common stock under employee stock plans	1,138	1		7,203		—	—		—		—		—		7,204
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(169)	—		(3,478)		—	—		—		—		—		(3,478)
Stock-based compensation	—	—		23,911		—	—		—		—		—		23,911
Repurchase and retirement of common stock	(3,763)	(4)		(76,770)		—	—		—		—		—		(76,774)
Repurchases of convertible notes (a)	—	—		(46,121)		—	—		—		—		—		(46,121)
Net loss	—	—		—		—	—		—		(20,006)		—		(20,006)
Other comprehensive loss	—	—		—		—	—		(16,034)		—		—		(16,034)
Balance at March 31, 2020	284,832	$	285	$	1,520,734	3,751	$	(16,788)	$	(130,077)	$	(264,933)	$	—	$	1,109,221

For the six months ended March 31, 2020

	Common Stock			Additional Paid-In Capital		Treasury Stock			Accumulated Other Comprehensive Loss		Accumulated Deficit		Noncontrolling Interests		Total Stockholders' Equity
	Shares	Amount				Shares	Amount
	(In thousands)
Balance at September 30, 2019	289,680	$	290	$	2,597,889	3,751	$	(16,788)	$	(132,773)	$	(293,612)	$	18,144	$	2,173,150
Cerence spin-off	—	—		(922,567)		—	—		12,331		—		(18,144)		(928,380)
Issuance of common stock under employee stock plans	6,720	7		7,253		—	—		—		—		—		7,260
Cancellation of restricted stock, and repurchase of common stock at cost for employee tax withholding	(2,111)	(2)		(36,605)		—	—		—		—		—		(36,607)
Stock-based compensation	—	—		90,093		—	—		—		—		—		90,093
Repurchase and retirement of common stock	(9,457)	(10)		(169,208)		—	—		—		—		—		(169,218)
Repurchases of convertible notes (a)	—	—		(46,121)		—	—		—		—		—		(46,121)
Net income	—	—		—		—	—		—		28,679		—		28,679
Other comprehensive loss	—	—		—		—	—		(9,635)		—		—		(9,635)
Balance at March 31, 2020	284,832	$	285	$	1,520,734	3,751	$	(16,788)	$	(130,077)	$	(264,933)	$	—	$	1,109,221

(a)According to ASC 470-20, cash consideration paid to repurchase and retire our convertible notes was first allocated to debt component based on the actual fair value on the trading date, and the remaining consideration was allocated to additional paid-in-capital.

See accompanying notes.

5

NUANCE COMMUNICATIONS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended March 31,
	2021		2020
	(Unaudited)
	(In thousands)
Cash flows from operating activities:
Net income from continuing operations	$	19,688	$	17,141
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	15,609		15,129
Amortization	30,476		30,845
Stock-based compensation	69,782		62,536
Non-cash interest expense	24,799		25,318
Deferred tax benefit	(4,619)		(40,901)
Loss on extinguishment of debt	—		18,656
Other	3,772		2,350
Changes in operating assets and liabilities, excluding effects of acquisitions:
Accounts receivable	(9,084)		19,660
Prepaid expenses and other assets	(12,866)		3,877
Accounts payable	7,066		(5,117)
Accrued expenses and other liabilities	(1,119)		(58,593)
Deferred revenue	(971)		24,638
Net cash provided by operating activities - continuing operations	142,533		115,539
Net cash provided by operating activities - discontinued operations	7,087		25,892
Net cash provided by operating activities	149,620		141,431
Cash flows from investing activities:
Capital expenditures	(32,719)		(31,187)
Proceeds from disposition of businesses, net of transaction fees	9,885		—
Purchases of marketable securities and other investments	(67,000)		(148,880)
Proceeds from sales and maturities of marketable securities and other investments	66,518		224,987
Payments for business and asset acquisitions, net of cash acquired	(45,175)		—
Other	501		1,332
Net cash (used in) provided by investing activities	(67,990)		46,252
Cash flows from financing activities:
Repurchase and redemption of debt	—		(513,642)
Net distribution from Cerence upon the spin-off	—		139,090
Payments for repurchase of common stock	—		(169,218)
Proceeds from issuance of common stock from employee stock plans	8,368		7,204
Proceeds from the revolving credit facility	—		230,000
Payments for taxes related to net share settlement of equity awards	(48,956)		(36,488)
Other financing activities	(2,235)		(2,834)
Net cash used in financing activities	(42,823)		(345,888)
Effects of exchange rate changes on cash and cash equivalents	2,811		(4,849)
Net increase (decrease) in cash and cash equivalents	41,618		(163,054)
Cash and cash equivalents at beginning of period	301,233		560,961
Cash and cash equivalents at end of period	$	342,851	$	397,907

See accompanying notes.

6

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Presentation

Nuance Communications, Inc. ("we", "Nuance", "our", "us", or the "Company") is a pioneer and leader in conversational and cognitive artificial intelligence ("AI") innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We had three reportable segments as of March 31, 2021: Healthcare, Enterprise, and Other. See Note 18 for a description of each of these segments.

Although we believe the disclosures included herein are adequate to ensure that the condensed consolidated financial statements are fairly presented, certain information and footnote disclosures to the financial statements have been condensed or omitted in accordance with the rules and regulations of the SEC. Accordingly, the condensed consolidated financial statements and the footnotes included herein should be read in conjunction with the audited financial statements and the footnotes included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The results of operations for the interim periods presented are not necessarily indicative of the results for the entire fiscal year or any future period.

On April 11, 2021, we entered into an Agreement and Plan of Merger ( the "Merger Agreement") with Microsoft Corporation ("Microsoft") and Big Sky Merger Sub Inc. ("Merger Sub"). Subject to the terms and conditions of the Merger Agreement, Microsoft has agreed to acquire Nuance for $56.00 per share in an all-cash transaction. Pursuant to the Merger Agreement, a wholly-owned subsidiary of Microsoft will merge with and into Nuance ("the Merger") with Nuance surviving as a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. The transaction is currently intended to close by December 31, 2021. Consummation of the Merger is subject to certain conditions, including the receipt of the necessary approval from our stockholders, the satisfaction of certain regulatory approvals and other customary closing conditions.

For additional information related to the Merger Agreement, please refer to the definitive proxy statement and other relevant materials in connection with the transaction that we will file with the SEC and which will contain important information about Nuance and the Merger.

As more fully described in Note 11, during the second quarter of fiscal year 2021, our common stock price exceeded 130% of the applicable conversion price for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days ending March 31, 2021. As a result, the holders of our 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between April 1, 2021 and June 30, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. All three convertible notes with a total net book value of $1.07 billion were included within current liabilities as of March 31, 2021.

Should any holders elect to convert, the principal amount of the convertible debentures would be payable in cash, and any amount payable in excess of the principal amount would be paid in cash or shares of our common stock at our election. Although the holders of our 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures previously had the right to convert their debentures between January 1, 2021 and March 31, 2021 as our common stock price exceeded 130% of the applicable conversion price for these debentures for at least 20 trading days during the 30 consecutive trading days ending December 31, 2020, there were no material exercises of the conversion rights during the second quarter ended March 31, 2021. Subsequent to the balance sheet date, holders of our 1.5% 2035 Debentures submitted conversion notices with a total value of approximately $118.3 million.

Our convertible debentures are actively traded in the open market. The 1.25% 2025 Debentures trade at a price consistently in excess of their conversion values. Therefore, we believe that it is uneconomic, and thus unlikely, for the holders of the 1.25% 2025 Debentures to early exercise their conversion rights. In the event that holders of any of our debentures presented an amount for settlement that exceeded our then available sources of liquidity, we may need to obtain additional financing, which we believe would be available to us based upon our assessment of the prevailing market and business conditions and our experience of successful capital raising activities.

2. Summary of Significant Accounting Policies

7

NUANCE COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Recently Adopted Accounting Standards

Internal-Use Software

In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15, "Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract", which became effective for us during the first quarter of fiscal year 2021. The guidance requires that implementation costs related to a hosting arrangement that is a service contract be capitalized and amortized over the term of the hosting arrangement, starting when the module or component of the hosting arrangement is ready for its intended use. The guidance is applied retrospectively to each period presented. The implementation did not have a material impact on our condensed consolidated financial statements.

Current Expected Credit Losses

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which became effective for us during the first quarter of fiscal year 2021. The guidance requires entities to estimate an expected lifetime credit loss on financial assets ranging from short-term trade accounts receivable to long-term financial assets using a forward-looking approach, taking into consideration historical experience, current conditions, and supportable forecasts that impact collectibility. The implementation did not have a material impact on our condensed consolidated financial statements.

Issued Accounting Standards Not Yet Adopted

From time to time, new accounting pronouncements are issued by the FASB and are adopted by us as of the specified effective dates. Unless otherwise discussed, such pronouncements did not have or will not have a significant impact on our consolidated financial position, results of operations or cash flows, or do not apply to our operations.

Convertible Notes

In August 2020, the FASB issued ASU 2020-06, "Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity," which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The new guidance eliminates two of the three models in Accounting Standards Codification ("ASC") 470-202 that require separating embedded conversion features from convertible instruments. As a result, only conversion features accounted for under the substantial premium model in ASC 470-20 and those that require bifurcation in accordance with ASC 815-153 will be accounted for separately. For contracts in an entity’s own equity, the new guidance eliminates some of the requirements in ASC 815-404 for equity classification. The guidance also addresses how convertible instruments are accounted for in the diluted earnings per share calculation and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. The guidance will be effective for annual periods beginning after December 15, 2021, and interim periods therein. Early adoption is permitted for all entities for fiscal periods beginning after December 15, 2020, including interim periods within the same fiscal year. Entities are allowed to adopt the guidance using either the modified or full retrospective approach. We are currently assessing the provisions of the guidance and the impact on our condensed consolidated financial statements.

3. Revenue Recognition

We derive revenue from the following sources: (1) hosting services, (2) software licenses, including royalties, (3) maintenance and support ("M&S"), (4) professional services, and (5) sale of hardware. Revenue is reported net of applicable sales and use tax, value-added tax and other transaction taxes imposed on the related transaction including mandatory government charges that are passed through to our customers. We account for a contract when both parties have approved and committed to the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectibility of the consideration is probable.

The majority of our arrangements with customers typically contain multiple products and services. We account for individual products and services separately if they are distinct, that is, if a product or service is separately identifiable from other items in the contract and if a customer can benefit from it on its own or with other resources that are readily available to the customer.

We recognize revenue after applying the following five steps:

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•identification of the contract, or contracts, with a customer;

•identification of the performance obligations in the contract, including whether they are distinct within the context of the contract;

•determination of the transaction price, including the constraint on variable consideration;

•allocation of the transaction price to the performance obligations in the contract; and

•recognition of revenue when, or as, performance obligations are satisfied.

We allocate the transaction price of the arrangement based on the relative estimated standalone selling price ("SSP") of each distinct performance obligation. In determining SSP, we maximize observable inputs and consider a number of data points, including:

•the pricing of standalone sales (in the instances where available);

•the pricing established by management when setting prices for deliverables that are intended to be sold on a standalone basis;

•contractually stated prices for deliverables that are intended to be sold on a standalone basis; and

•other pricing factors, such as the geographical region in which the products are sold and expected discounts based on the customer size and type.

We only include estimated amounts of variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. We reduce transaction prices for estimated returns and other allowances that represent variable consideration under ASU No. 2014-09, "Revenue from Contracts with Customers: Topic 606" ("ASC 606"), which we estimate based on historical return experience and other relevant factors and record a reduction to revenue and accounts receivable. Other forms of contingent revenue or variable consideration are infrequent.

Revenue is recognized when control of these products and services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services.

We assess the timing of the transfer of products or services to the customer as compared to the timing of payments to determine whether a significant financing component exists. In accordance with the practical expedient in ASC 606-10-32-18, we do not assess the existence of a significant financing component when the difference between payment and transfer of deliverables is a year or less. If the difference in timing arises for reasons other than the provision of financing to either the customer or us, no financing component is deemed to exist. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our services, not to receive or provide financing from or to customers. We do not consider set-up fees nor other upfront fees paid by our customers to represent a financing component.

Certain products are sold through distributors or resellers. Certain distributors and resellers have been granted right of return and selling incentives which are accounted for as variable consideration when estimating the amount of revenue to be recognized. Returns and credits are estimated at the contract inception and updated at the end of each reporting period as additional information becomes available. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate the variable consideration associated with this group of customers.

Reimbursements for out-of-pocket costs generally include, but are not limited to, costs related to transportation, lodging and meals. Revenue from reimbursed out-of-pocket costs is accounted for as variable consideration.

Shipping and handling activities are not considered a contract performance obligation. We record shipping and handling costs billed to customers as revenue with offsetting costs recorded as cost of revenue.

Performance Obligations

Hosting

Hosting services, which allow our customers to use the hosted software over the contract period without taking possession of the software, are provided on a usage basis as consumed or on a fixed fee subscription basis. Our hosting contract terms generally range from one to five years.

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As each day of providing services is substantially the same and the customer simultaneously receives and consumes the benefits as access is provided, we have determined that our hosting services arrangements are a single performance obligation comprised of a series of distinct services. These services include variable consideration, which is typically a function of usage. We recognize revenue as each distinct service period is performed (i.e., recognized as incurred).

Subscription-based revenue represents a single promise to stand-ready to provide access to our hosting services. Revenue is recognized over time on a ratable basis over the hosting contract term, which generally ranges from one to five years.

Software Licenses

On-premise software licenses sold with non-distinct professional services to customize and/or integrate the underlying software are accounted for as a combined performance obligation. Revenue from the combined performance obligation is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.

Revenue from distinct on-premise software licenses, which do not require professional services to customize and/or integrate the software license, is recognized at the point in time when the software is made available to the customer and control is transferred.

Revenue from software licenses sold on a royalty basis, where the license of intellectual property is the predominant item to which the royalty relates, is recognized in the period the usage occurs in accordance with the practical expedient in ASC 606-10-55-65(A).

Maintenance and Support

Our M&S contracts generally include telephone support and the right to receive unspecified upgrades and updates on a when-and-if available basis. M&S revenue is recognized over time on a ratable basis over the contract period because we transfer control evenly by providing a stand-ready service.

Professional Services

Revenue from distinct professional services, including training, is recognized over time based upon the progress towards completion of the project, which is measured based on the labor hours already incurred to date as compared to the total estimated labor hours.

Hardware

Hardware revenue is recognized at the point in time when control is transferred to the customer, which is typically upon delivery.

Significant Judgments

Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. Our license contracts often include professional services to customize and/or integrate the licenses into the customer’s environment. Judgment is required to determine whether the license is considered distinct and accounted for separately, or not distinct and accounted for together with professional services.

Judgments are required to determine the SSP for each distinct performance obligation. When SSP is directly observable, we estimate SSP based upon the historical transaction prices, adjusted for geographic considerations, customer classes, and customer relationship profiles. In instances where SSP is not directly observable, we determine SSP using information that may include market conditions and other observable inputs. We may have more than one SSP for individual products and services due to the stratification of those products and services by customers and circumstances. In these instances, we may use information such as the size of the customer and geographic region in determining SSP. Determining SSP for performance obligations which we never sell separately also requires significant judgment. In estimating the SSP for such performance obligations, we consider the likely price that would have resulted from established pricing practices had the deliverable been offered separately and the prices a customer would likely be willing to pay.

From time to time, we may enter into arrangements with third party suppliers to resell products or services. In such cases, we evaluate whether we are the principal (i.e. report revenues on a gross basis) or agent (i.e. report revenues on a net basis). In doing so, we first evaluate whether we control the good or service before it is transferred to the customer. If we control the good

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or service before it is transferred to the customer, we are the principal; if not, we are the agent. Generally, we control a promised good or service before transferring that good or service to the customer and act as the principal to the transaction. Determining whether we control the good or service before it is transferred to the customer may require judgment.

Disaggregated Revenue

We disaggregate revenue from contracts with customers by reportable segment and products and services as this presentation depicts the timing, risks and uncertainty of our revenue streams, which is also in line with how we manage our businesses, assess performance, and determine management compensation. Our disaggregated revenue from continuing operations is as follows (dollars in thousands):

	Three Months Ended March 31,
	2021								2020
	Hosting and professional services		Product and licensing		Maintenance and support		Total		Hosting and professional services		Product and licensing		Maintenance and support		Total
Healthcare	$	117,593	$	61,326	$	32,973	$	211,892	$	93,646	$	43,266	$	34,070	$	170,982
Enterprise	75,740		24,057		30,200		129,997		80,840		26,258		30,135		137,233
Other	4,648		427		13		5,088		7,661		39		9		7,709
Total revenues	$	197,981	$	85,810	$	63,186	$	346,977	$	182,147	$	69,563	$	64,214	$	315,924

	Six Months Ended March 31,
	2021								2020
	Hosting and professional services		Product and licensing		Maintenance and support		Total		Hosting and professional services		Product and licensing		Maintenance and support		Total
Healthcare	$	228,397	$	116,108	$	66,719	$	411,224	$	182,073	$	135,058	$	67,661	$	384,792
Enterprise	154,481		54,343		60,325		269,149		158,476		57,995		59,146		275,617
Other	10,935		1,396		26		12,357		15,519		1,525		(20)		17,024
Total revenues	$	393,813	$	171,847	$	127,070	$	692,730	$	356,068	$	194,578	$	126,787	$	677,433

Hardware revenue comprised approximately $7.1 million and $13.7 million of total product and licensing revenue for the three and six months ended March 31, 2021, respectively, and $8.5 million and $14.8 million of total product and licensing revenue for the three and six months ended March 31, 2020, respectively.

Contract Acquisition Costs

We are required to capitalize certain contract acquisition costs under ASC 606. The capitalized costs primarily relate to paid commissions and other direct, incremental costs to acquire customer contracts. In accordance with the practical expedient in ASC 606-10-10-4, we apply a portfolio approach to estimate contract acquisition costs for groups of customer contracts. We elect to apply the practical expedient in ASC 340-40-25-4 and will expense contract acquisition costs as incurred where the expected period of benefit is one year or less. Sales commissions paid on renewal maintenance and support are not commensurate with sales commissions paid on the initial maintenance and support contract. Contract acquisition costs are deferred and amortized on a straight-line basis over the period of benefit, which we have estimated to be between one and five years. The period of benefit was determined based on an average customer contract term, expected contract renewals, changes in technology and our ability to retain customers including canceled contracts. Contract acquisition costs are classified as current or noncurrent assets based on when the expense will be recognized. The current and noncurrent portions of contract acquisition costs are included in Prepaid expenses and other current assets, and Other assets, respectively. As of March 31, 2021, we had $31.2 million of current contract acquisition costs from continuing operations and $67.1 million of noncurrent contract acquisition costs from continuing operations. As of September 30, 2020, we had $20.9 million of current contract acquisition costs from continuing operations and $51.6 million of noncurrent contract acquisition costs from continuing operations. Commission expense is primarily included in sales and marketing expense on the consolidated statements of operations. We had amortization expense related to contract acquisition costs from continuing operations of $4.7 million and $9.4 million for the three and six months ended March 31, 2021, respectively, and $4.0 million and $7.6 million for the three and six months ended March 31, 2020, respectively. There was no impairment related to commission costs capitalized.

Capitalized Contract Costs

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We capitalize incremental costs incurred to fulfill our contracts that (1) relate directly to the contract, (2) are expected to generate resources that will be used to satisfy our performance obligation under the contract, and (3) are expected to be recovered through revenue generated under the contract. Our capitalized costs consist primarily of setup costs, such as costs to stand-up, customize, and develop applications for each customer. These costs are incurred to satisfy our stand-ready obligation to provide access to our connected offerings. The contract costs are expensed to cost of revenue as we satisfy our stand-ready obligation over the contract term, which we estimate to be between one and five years. The contract term estimation was determined based on an average customer contract term, expected contract renewals, changes in technology, and our ability to retain customers including canceled contracts. We classify capitalized contract costs as current or noncurrent based on the timing of when we expect to recognize the expense. The current and noncurrent portions of capitalized contract fulfillment costs are included in Prepaid expenses and other current assets, and Other assets, respectively. As of March 31, 2021, we had $19.8 million of short-term contract costs from continuing operations included with Prepaid expenses and other current assets and $33.1 million of long-term costs from continuing operations included within Other assets. As of September 30, 2020, we had $18.0 million of short-term contract costs from continuing operations included with Prepaid expenses and other current assets and $30.7 million of long-term costs from continuing operations included within Other assets.

Trade Accounts Receivable and Contract Balances

We classify our right to consideration in exchange for deliverables as either a receivable or a contract asset. A receivable is a right to consideration that is unconditional (i.e. only the passage of time is required before payment is due). We present such receivables in Accounts receivable, net in our consolidated balance sheets at their net estimated realizable value. We maintain an allowance for doubtful accounts to provide for the estimated amount of receivables that may not be collected. The allowance is based upon an assessment of customer creditworthiness, historical payment experience, the age of outstanding receivables and other applicable factors.

Our contract assets and liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period.

Contract assets include unbilled amounts from long-term contracts when revenue recognized exceeds the amount billed to the customer, and right to payment is not solely subject to the passage of time. The current and noncurrent portions of contract assets are included in Prepaid expenses and other current assets, and Other assets. As of March 31, 2021, we had $60.5 million of current contract assets from continuing operations and $94.2 million of noncurrent contract assets from continuing operations. As of September 30, 2020, we had $48.7 million of current contract assets from continuing operations and $107.4 million of noncurrent contract assets from continuing operations. The table below shows significant changes in contract assets of continuing operations (dollars in thousands):

	Contract assets
Balance as of September 30, 2020	$	156,142
Revenues recognized but not billed	225,454
Amounts reclassified to accounts receivable	(226,902)
Balance at March 31, 2021	$	154,694

Our contract liabilities, or Deferred revenue, consist of advance payments and billings in excess of revenues recognized. We classify Deferred revenue as current or noncurrent based on when we expect to recognize the revenues. As of March 31, 2021, we had $357.7 million of Deferred revenue. The table below shows significant changes in Deferred revenue of continuing operations (dollars in thousands):

	Deferred revenue
Balance as of September 30, 2020	$	348,180
Amounts bill but not recognized	403,593
Revenue recognized	(394,025)
Balance at March 31, 2021	$	357,748

Remaining Performance Obligations

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied as of March 31, 2021 (dollars in thousands):

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	Within One Year		Two to Four Years		Greater than Four Years		Total
Total revenue	$	718,566	$	925,100	$	28,857	$	1,672,523

The table above includes fixed backlogs and does not include variable backlog derived from contingent usage-based activities, such as royalties and usage-based hosting revenue.

4. Disposition of Businesses

Disposition of Our Medical Transcription and EHR Implementation businesses

On November 17, 2020, we entered into a definitive agreement (the “Agreement”) to sell our medical transcription and electronic healthcare record ("EHR") implementation businesses (the "Business") to Assured Healthcare Partners and Aeries Technology Group (together, the “Buyer”). Pursuant to the Agreement, we sold and transferred, and the Buyer purchased and acquired, (a) the shares of certain subsidiaries through which we operate a portion of the Business and (b) certain assets used in or related to the Business; and the Buyer assumed certain liabilities related to such assets of the Business, subject to certain exclusions and indemnities as set forth in the Agreement.

On March 1, 2021, we completed the sale of the Business and received approximately $29.8 million in cash, subject to post-closing finalization of the adjustments set forth in the Agreement. As a result, we recorded a loss of $12.5 million, which is included within Net (loss) income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.

Additionally, as in accordance with the Agreement, we retained certain identifiable accounts receivable balances with the sale of the Business. As of March 31, 2021, the balance of retained accounts receivable, net is $3.5 million. This is immaterial to our consolidated balance sheet and has been included within our continuing operations balance sheet.

For all periods presented, the Businesses' results of operations have been included within discontinued operations in our condensed consolidated financial statements.

Spin-off of Automotive

On October 1, 2019, we completed the spin-off of our Automotive business as an independent public company, Cerence, and a pro rata and tax-free distribution to our stockholders of all of the outstanding shares of Cerence owned by Nuance on October 1, 2019. The distribution was made in the amount of one share of Cerence common stock for every eight shares of Nuance common stock owned by Nuance’s stockholders of record as of 5:00 p.m. Eastern Time on September 17, 2019.

In connection with the spin-off, on September 30, 2019, we sold 1.8% of our equity interest in Cerence to a non-affiliated third party for a total cash consideration of $9.8 million. The difference between the consideration received and the carrying amount of the non-controlling interest was recognized in additional paid-in capital, which was subsequently derecognized as part of the spin-off transaction. Effective as of October 1, 2019, for all periods presented, the results of operations of our former Automotive business have been included within discontinued operations.

For the six months ended March 31, 2020, we incurred cash payments of $13.3 million related to the separation and spin-off of our Automotive business, which have been presented as operating cash flows from discontinued operations.

The historical results of operations of Automotive have been included within discontinued operations in our condensed consolidated financial statements.

The following table summarizes the results of the discontinued operations (dollars in thousands):

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	Three Months Ended March 31,
	2021		2020
	Medical Transcription and EHR Implementation		Medical Transcription and EHR Implementation
Major line items constituting net (loss) income of discontinued operations:
Revenue	$	33,421	$	53,413
Cost of revenue	25,682		33,036
Research and development	1,237		1,818
Sales and marketing	1,056		850
General and administrative	54		352
Amortization of intangible assets	1,629		3,291
Acquisition-related costs, net	—		2
Restructuring and other charges, net	4,409		153
(Loss) income from discontinued operations before income taxes	(646)		13,911
Provision for income taxes	3,178		7,434
Loss on disposition	(12,544)		—
Net (loss) income from discontinued operations	$	(16,368)	$	6,477
Supplemental information:
Depreciation	$	739	$	2,420
Amortization	$	1,629	$	3,350
Stock compensation	$	1,149	$	1,528
Capital expenditures	$	—	$	287

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	Six Months Ended March 31,
	2021		2020
	Medical Transcription and EHR Implementation		Medical Transcription and EHR Implementation		Automotive		Total
Major line items constituting net (loss) income of discontinued operations:
Revenue	$	81,071	$	110,137	$	—	$	110,137
Cost of revenue	54,834		67,719		—		67,719
Research and development	2,535		3,766		—		3,766
Sales and marketing	1,964		1,546		—		1,546
General and administrative	66		332		—		332
Amortization of intangible assets	4,073		6,651		—		6,651
Acquisition-related costs, net	—		(51)		—		(51)
Restructuring and other charges, net	8,847		153		7,386		7,539
Income (loss) from discontinued operations before income taxes	8,752		30,021		(7,386)		22,635
Provision (benefit) for income taxes	4,635		12,291		(1,194)		11,097
Loss on disposition	(12,544)		—		—		—
Net (loss) income from discontinued operations	$	(8,427)	$	17,730	$	(6,192)	$	11,538
Supplemental information:
Depreciation	$	1,802	$	4,021	$	—	$	4,021
Amortization	$	4,073	$	6,768	$	—	$	6,768
Stock compensation	$	1,436	$	2,359	$	—	$	2,359
Capital expenditures	$	57	$	308	$	—	$	308

The following table summarizes the assets and liabilities of our Medical Transcription and EHR Implementation Businesses included within discontinued operations. (dollars in thousands):

	September 30, 2020
Major classes of assets of discontinued operations:
Accounts receivable, net	$	24,993
Prepaid expenses and other current assets	10,499
Land, building and equipment, net	6,129
Goodwill	13,217
Intangible assets, net	46,214
Right-of-use assets	5,437
Other noncurrent assets	8,033
Total assets	$	114,522
Major classes of liabilities of discontinued operations:
Accounts payable	$	3,289
Accrued expenses and other current liabilities	14,010
Deferred revenue	17,452
Operating lease liabilities	3,625
Other noncurrent liabilities	12,150
Total liabilities	$	50,526

5. Business Acquisitions

As part of our business strategy, we have acquired, and may acquire in the future, certain businesses and technologies primarily to expand our products and service offerings.

Fiscal Year 2021 Acquisitions

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For the six months ended March 31, 2021, we completed an acquisition in our Healthcare segment for a total cash consideration of $45.2 million. As a result, we recognized goodwill of $28.2 million and intangible assets of $19.8 million related to technology with a useful life of 5.0 years. The results of operations of the acquired entity have been included within our consolidated statement of operations from the acquisition date. The acquisition was not material to our condensed consolidated financial statements.

Acquisition-Related Costs, net

Acquisition-related costs include costs related to business and asset acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs and earn-out payments, and other costs related to integration activities; (ii) professional service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) fair value adjustments to acquisition-related contingencies.

A summary of acquisition-related costs, net is as follows (dollars in thousands):

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
Transition and integration costs	$	1,142	$	1,366	$	1,214	$	2,821
Professional service fees	527		312		780		79
Acquisition-related adjustments	—		—		—		(2)
Total	$	1,669	$	1,678	$	1,994	$	2,898

6. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill by reportable segment for the six months ended March 31, 2021 are as follows (dollars in thousands): 

Goodwill

	Healthcare		Enterprise		Other		Total
Balance as of September 30, 2020	$	1,424,959	$	682,600	$	12,936	$	2,120,495
Acquisitions	28,210		—		—		28,210
Effect of foreign currency translation	1,825		3,695		218		5,738
Balance at March 31, 2021	$	1,454,994	$	686,295	$	13,154	$	2,154,443

Other Intangible Assets

The changes in the carrying amount of intangible assets for the six months ended March 31, 2021 are as follows (dollars in thousands):

	Intangible Assets
Balance at September 30, 2020	$	167,270
Acquisitions	19,840
Amortization	(30,476)
Effect of foreign currency translation	515
Balance at March 31, 2021	$	157,149

7. Financial Instruments and Hedging Activities

Derivatives Not Designated as Hedges

Forward Currency Contracts

We have operations in a number of international locations where currency exchange rates can be volatile. We utilize foreign currency forward contracts to mitigate the risks associated with changes in foreign currency exchange rates so that our exposure to foreign currencies will be mitigated or offset by the gains or losses on the foreign currency forward contracts. Generally, we

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enter into such contracts for less than 90 days and have no cash requirements until maturity. As of March 31, 2021 and September 30, 2020, we had outstanding contracts with a total notional value of $25.0 million and $40.7 million, respectively.

We did not designate any forward contracts as hedging instruments for the six months ended March 31, 2021 or 2020. Therefore, changes in fair value of foreign currency forward contracts were recognized within Other income (expense), net in our consolidated statements of operations. The cash flows related to the settlement of forward contracts not designated as hedging instruments are included in cash flows from investing activities within our consolidated statement of cash flows.

A summary of the derivative instruments is as follows (dollars in thousands):

Derivatives Not Designated as Hedges	Balance Sheet Classification	Fair Value
		March 31, 2021		September 30, 2020
Foreign currency forward contracts	Prepaid expenses and other current assets	$	73	$	109
Foreign currency forward contracts	Accrued expenses and other current liabilities	$	(7)	$	(92)

A summary of other income (expense), net related to foreign currency forward contracts for the three and six months ended March 31, 2021 and 2020 is as follows (dollars in thousands):

	Income Statement Classification	Three Months Ended March 31,				Six Months Ended March 31,
Derivatives Not Designated as Hedges	Income (Loss) Recognized	2021		2020		2021		2020
Foreign currency forward contracts	Other income (expense), net	$	1,096	$	(143)	$	548	$	442

8. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. Valuation techniques must maximize the use of observable inputs and minimize the use of unobservable inputs. When determining the fair value measurements for assets and liabilities required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and consider assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance.

The determination of the applicable level within the hierarchy of a particular financial asset or liability depends on the lowest level of inputs that are significant to the fair value measurement as of the measurement date as follows:

•Level 1: Quoted prices for identical assets or liabilities in active markets.

•Level 2: Observable inputs other than those described as Level 1.

•Level 3: Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and September 30, 2020 consisted of the following (dollars in thousands):

	March 31, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds (a)	$	223,067	$	—	$	—	$	223,067
Time deposits (b)	—		56,179		—		56,179
Commercial paper, $56,966 at cost (b)	—		57,030		—		57,030
Corporate notes and bonds, $9,224 at cost (b)	—		9,216		—		9,216
Foreign currency exchange contracts (b)	—		73		—		73
Total assets at fair value	$	223,067	$	122,498	$	—	$	345,565
Liabilities:
Foreign currency exchange contracts (b)	$	—	(7)		$	—	$	(7)
Contingent acquisition payments (c)	—		—		(1,743)		(1,743)
Total liabilities at fair value	$	—	$	(7)	$	(1,743)	$	(1,750)

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	September 30, 2020
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds (a)	$	182,645	$	—	$	—	$	182,645
Time deposits (b)	—		95,180		—		95,180
Commercial paper, $33,265 at cost (b)	—		33,290		—		33,290
Corporate notes and bonds, $15,460 at cost (b)	—		15,480		—		15,480
Foreign currency exchange contracts (b)	—		109		—		109
Total assets at fair value	$	182,645	$	144,059	$	—	$	326,704
Liabilities:
Foreign currency exchange contracts (b)	$	—	$	(92)	$	—	$	(92)
Contingent acquisition payments (c)	—		—		(1,796)		(1,796)
Total liabilities at fair value	$	—	$	(92)	$	(1,796)	$	(1,888)

(a)Money market funds and time deposits with original maturity of 90 days or less are included within cash and cash equivalents in the consolidated balance sheets and are valued at quoted market prices in active markets.

(b)Time deposits, commercial paper, corporate notes and bonds, and foreign currency exchange contracts are recorded at fair market values, which are determined based on the most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. Time deposits are generally for terms of one year or less. Commercial paper and corporate notes and bonds generally mature within three years and had a weighted average maturity of 0.44 years as of March 31, 2021 and 0.31 years as of September 30, 2020.

(c)    The fair values of our contingent consideration arrangements were determined using either the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow method.

The estimated fair value of our total debt was approximately $2,857.6 million (face value $1,666.5 million) as of March 31, 2021 and $2,355.5 million (face value $1,666.5 million) as of September 30, 2020 based on Level 2 measurements. The fair value of each borrowing was estimated using the average of the bid and ask trading quotes at each respective reporting date. There was no balance outstanding under our revolving credit agreement as of March 31, 2021 or September 30, 2020.

Additionally, contingent acquisition payments are recorded at fair values upon the acquisition and are remeasured in subsequent reporting periods with the changes in fair values recorded within acquisition-related costs, net. Such payments are contingent upon the achievement of specified performance targets and are valued using the option pricing model with Monte Carlo simulation or the probability-weighted discounted cash flow model (Level 3 measurement).

The following table provides a summary of changes in the aggregate fair value of the contingent acquisition payments for all periods presented (dollars in thousands):

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
Balance at beginning of period	$	1,847	$	2,493	$	1,796	$	2,550
Payments and foreign currency translation	(104)		—		(53)		(57)
Balance at end of period	$	1,743	$	2,493	$	1,743	$	2,493

Contingent acquisition payments are to be made in periods through fiscal year 2021. As of March 31, 2021, the maximum amount payable based on the agreements was $3.0 million if the specified performance targets are achieved.

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9. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (dollars in thousands): 

	March 31, 2021		September 30, 2020
Compensation	$	88,503	$	110,827
Cost of revenue related liabilities	26,634		25,434
Accrued interest payable	13,419		13,484
Consulting and professional fees	8,712		10,589
Sales and marketing incentives	1,585		2,021
Sales and other taxes payable	6,929		6,339
Operating lease obligations	26,857		26,284
Other	10,191		4,276
Total	$	182,830	$	199,254

10. Restructuring and Other Charges, net

Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature, are the result of unplanned events, and arise outside of the ordinary course of our business.

The following table represents the roll forward of restructuring liabilities for the six months ended March 31, 2021 (dollars in thousands): 

	Personnel		Facilities		Total
Balance at September 30, 2020	$	1,243	$	15,516	$	16,759
Restructuring charges, net	5,896		6,074		11,970
Non-cash adjustment	(839)		(2,498)		(3,337)
Cash payments	(4,714)		(2,289)		(7,003)
Balance at March 31, 2021	$	1,586	$	16,803	$	18,389

The table below presents the Restructuring and other charges, net associated with each segment, but excluded from calculation of each segment's profit (dollars in thousands):

	Three Months Ended March 31,
	2021										2020
	Personnel		Facilities		Total Restructuring		Other Charges		Total		Personnel		Facilities		Total Restructuring		Other Charges		Total
Healthcare	$	702	$	114	$	816	$	—	$	816	$	353	$	248	$	601	$	—	$	601
Enterprise	82		2,732		2,814		—		2,814		233		213		446		—		446
Other	—		139		139		—		139		—		54		54		—		54
Corporate	323		18		341		(1,631)		(1,290)		683		883		1,566		3,509		5,075
Total	$	1,107	$	3,003	$	4,110	$	(1,631)	$	2,479	$	1,269	$	1,398	$	2,667	$	3,509	$	6,176

	Six Months Ended March 31,
	2021										2020
	Personnel		Facilities		Total Restructuring		Other Charges		Total		Personnel		Facilities		Total Restructuring		Other Charges		Total
Healthcare	$	3,334	$	681	$	4,015	$	—	$	4,015	$	1,629	$	1,775	$	3,404	$	—	$	3,404
Enterprise	1,264		5,204		6,468		—		6,468		1,537		718		2,255		—		2,255
Other	—		168		168		—		168		—		(311)		(311)		—		(311)
Corporate	1,298		21		1,319		(925)		394		1,016		351		1,367		6,144		7,511
Total	$	5,896	$	6,074	$	11,970	$	(925)	$	11,045	$	4,182	$	2,533	$	6,715	$	6,144	$	12,859

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Fiscal Year 2021

For the six months ended March 31, 2021, we recorded restructuring charges of $12.0 million, which included $5.9 million related to the termination of approximately 79 employees and $6.1 million of charges related to closing certain idle facilities. Of these amounts, $4.1 million was recorded for the three months ended March 31, 2021, which included $1.1 million related to the termination of approximately 22 employees and $3.0 million charge related to closing certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the geographic footprint of our offices and facilities. We expect the remaining outstanding severance of $1.6 million to be substantially paid during fiscal year 2021, and the remaining $16.8 million lease payments to be made through fiscal year 2027, in accordance with the terms of the applicable leases.

Additionally, for the six months ended March 31, 2021, we recorded $0.9 million for professional service receipts related to other corporate initiatives, of which we recorded $1.6 million during the three months ended March 31, 2021.

Fiscal Year 2020

For the six months ended March 31, 2020, we recorded restructuring charges of $6.7 million, which included $4.2 million related to the termination of approximately 51 employees and $2.5 million related to certain restructuring facilities. Of these amounts, $2.7 million was recorded for the three months ended March 31, 2020, which included $1.3 million related to the termination of approximately 14 employees and $1.4 million related to certain restructuring facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction.

Additionally, for the six months ended March 31, 2020, we recorded $4.2 million of costs related to the separation of our Automotive business and $2.0 million related to the impairment of a right-of-use asset of a restructuring facility, offset in part by a $0.1 million cash receipt from insurance claims related to a malware incident that occurred in the third quarter of fiscal year 2017 (the "2017 Malware Incident"). Of these amounts, we recorded $1.4 million costs related to the separation of our Automotive business, $2.0 million related to the impairment of a right-of-use asset of a restructuring facility, and a $0.1 million cash expense from insurance claims related to the 2017 Malware Incident for the three months ended March 31, 2020. The $2.0 million impairment charge for the three and six months ended March 31, 2020 was related to a restructuring facility as we re-assessed the timing and fees of the assumed sublease as a result of the COVID-19 pandemic.

11. Debt

As of March 31, 2021 and September 30, 2020, we had the following borrowing obligations (dollars in thousands): 

	March 31, 2021		September 30, 2020
5.625% Senior Notes due 2026, net of deferred issuance costs of $3.5 million and $3.9 million, respectively. Effective interest rate 5.625%.	$	496,456	$	496,148
1.000% Convertible Debentures due 2035, net of unamortized discount of $50.8 million and $64.8 million, respectively, and deferred issuance costs of $2.3 million and $2.9 million, respectively. Effective interest rate 5.622%.	623,405		608,767
1.250% Convertible Debentures due 2025, net of unamortized discount of $40.7 million and $45.2 million, respectively, and deferred issuance costs of $1.7 million and $1.9 million, respectively. Effective interest rate 5.578%.	220,271		215,582
1.500% Convertible Debentures due 2035, net of unamortized discount of $5.7 million and $10.4 million, respectively, and deferred issuance costs of $0.2 million and $0.3 million, respectively. Effective interest rate 5.394%.	221,507		216,627
Deferred issuance costs related to our Revolving Credit Facility	(2,157)		(451)
Total debt	1,559,482		1,536,673
Less: current portion (a)	(1,065,183)		(432,209)
Total long-term debt	$	494,299	$	1,104,464

(a) As of March 31, 2021, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between April 1, 2021 and June 30, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. As a result, the net carrying amounts of the convertible debentures were included in current liabilities as of March 31, 2021.

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The following table summarizes the maturities of our borrowing obligations as of March 31, 2021 (dollars in thousands):

Fiscal Year	Convertible Debentures (a)		Senior Notes		Total
2021	$	1,166,516	$	—	$	1,166,516
2022	—		—		—
2023	—		—		—
2024	—		—		—
2025	—		—		—
Thereafter	—		500,000		500,000
Total before unamortized discount	1,166,516		500,000		1,666,516
Less: unamortized discount and issuance costs	(101,333)		(5,701)		(107,034)
Total debt	$	1,065,183	$	494,299	$	1,559,482

(a) As more fully described below, as of March 31, 2021, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between April 1, 2021 and June 30, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. As a result, these convertible debentures were treated as if they were due in fiscal year 2021.

5.625% Senior Notes due 2026

In December 2016, we issued $500.0 million aggregate principal amount of 5.625% Senior Notes due on December 15, 2026 (the "2026 Senior Notes") in a private placement. The proceeds from the 2026 Senior Notes were approximately $495.0 million, net of issuance costs, and we used the proceeds to repurchase a portion of our then outstanding 5.375% Senior Notes due 2020. The 2026 Senior Notes bear interest at 5.625% per year, payable in cash semi-annually in arrears.

The 2026 Senior Notes are unsecured senior obligations and are guaranteed on an unsecured senior basis by certain of our domestic subsidiaries ("Subsidiary Guarantors"). The 2026 Senior Notes and the guarantees rank equally in right of payment with all of our and the Subsidiary Guarantors’ existing and future unsecured senior debt and rank senior in right of payment to all of our and the Subsidiary Guarantors’ future unsecured subordinated debt. The 2026 Senior Notes and guarantees effectively rank junior to all our secured debt and that of the Subsidiary Guarantors to the extent of the value of the collateral securing such debt and to all liabilities, including trade payables, of our subsidiaries that have not guaranteed the 2026 Senior Notes.

At any time before December 15, 2021, we may redeem all or a portion of the 2026 Senior Notes at a redemption price equal to 100% of the aggregate principal amount of the 2026 Senior Notes to be redeemed, plus a "make-whole" premium and accrued and unpaid interest to, but excluding, the redemption date. At any time on or after December 15, 2021, we may redeem all or a portion of the 2026 Senior Notes at certain redemption prices expressed as percentages of the principal amount, plus accrued and unpaid interest to, but excluding, the redemption date. At any time and from time to time before December 15, 2021, we may redeem up to 35% of the aggregate outstanding principal amount of the 2026 Senior Notes with the net cash proceeds received by us from certain equity offerings at a price equal to 105.625% of the aggregate principal amount, plus accrued and unpaid interest to, but excluding, the redemption date, provided that the redemption occurs no later than 120 days after the closing of the related equity offering, and at least 50% of the original aggregate principal amount of the 2026 Senior Notes remains outstanding immediately thereafter.

Upon the occurrence of a change in control or sale of substantially all assets, we must offer to repurchase the 2026 Senior Notes at a price equal to 100% in the case of an asset sale, or 101% in the case of a change of control, of the principal amount plus accrued and unpaid interest to, but excluding, the repurchase date.

1.0% Convertible Debentures due 2035

In December 2015, we issued $676.5 million in aggregate principal amount of 1.0% Senior Convertible Debentures due in 2035 (the "1.0% 2035 Debentures") in a private placement. Total proceeds were $663.8 million, net of issuance costs, and we used a portion to repurchase $38.3 million in aggregate principal on our 2.75% Senior Convertible Debentures due in 2031 (the “2.75% 2031 Debentures”) and to repay the aggregate principal balance of $472.5 million on our term loan under the amended and restated credit agreement. The 1.0% 2035 Debentures bear interest at 1.0% per year, payable in cash semi-annually in arrears. In addition to ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on December 15, 2022, contingent interest will accrue during any regular semi-annual interest period where the average trading price of our 1.0% 2035 Debentures for the ten trading day period immediately preceding the first day of such

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semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 1.0% 2035 Debentures, in which case, contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 1.0% 2035 Debentures mature on December 15, 2035, subject to the right of the holders to require us to redeem the 1.0% 2035 Debentures on December 15, 2022, 2027, or 2032. The 1.0% 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.0% 2035 Debentures. The 1.0% 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.

We account separately for the liability and equity components of the 1.0% 2035 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated $495.4 million to long-term debt, and $181.1 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through December 2022.

If converted, the principal amount of the 1.0% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election. The conversion of the 1.0% 2035 Debentures will be based upon a conversion ratio of 41.4576 common shares per $1,000 principal amount, subject to adjustments. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to June 15, 2035, on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.0% 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.0% 2035 Debentures; or (iv) at the option of the holder at any time on or after June 15, 2035. Additionally, we may redeem the 1.0% 2035 Debentures, in whole or in part, on or after December 20, 2022 for cash at a price equal to 100% of the principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.0% 2035 Debentures held by such holder on December 15, 2022, December 15, 2027, or December 15, 2032 at par plus accrued and unpaid interest. If we undergo a fundamental change or non-stock change of control (as described in the indenture for the 1.0% 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.0% 2035 Debentures to be purchased plus any accrued and unpaid interest.

The 1.0% 2035 Debentures were convertible as of March 31, 2021, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending March 31, 2021. As a result, the holders of our 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between April 1, 2021 and June 30, 2021. The holders previously had the right to convert all or any portion of their debentures at the aforementioned conversion ratio beginning January 1, 2021 through March 31, 2021. As of March 31, 2021, the net carrying amount of the 1.0% 2035 Debentures was included within the current portion of long-term debt, and $53.1 million has been reclassified from permanent equity to mezzanine equity. As of March 31, 2021, the if-converted value of the 1.0% 2035 Debentures exceeded its principal amount by $547.4 million.

1.25% Convertible Debentures due 2025

In March 2017, we issued $350.0 million in aggregate principal amount of 1.25% Senior Convertible Debentures due in 2025 (the "1.25% 2025 Debentures") in a private placement. The proceeds were approximately $343.6 million, net of issuance costs. We used a portion of the proceeds to repurchase 5.8 million shares of our common stock for $99.1 million and $17.8 million in aggregate principal on our 2.75% 2031 Debentures. The 1.25% 2025 Debentures bear interest at 1.25% per year, payable in cash semi-annually in arrears, beginning on October 1, 2017. The 1.25% 2025 Debentures mature on April 1, 2025. The 1.25% 2025 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.25% 2025 Debentures. The 1.25% 2025 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.

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We account separately for the liability and equity components of the 1.25% 2025 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. The guidance requires the carrying amount of the liability component to be estimated by measuring the fair value of a similar liability that does not have an associated conversion feature and record the remainder in stockholders’ equity. At issuance, we allocated $252.1 million to long-term debt, and $97.9 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through April 1, 2025.

If converted, the principal amount of the 1.25% 2025 Debentures is payable in cash and any amounts payable in excess of the principal amount will be paid in cash or shares of our common stock, at our election. The conversion of the 1.25% 2025 Debentures will be based upon a conversion ratio of 50.7957 common shares per $1,000 principal amount, subject to adjustments. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to October 1, 2024, on any date during any fiscal quarter (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) at any time on or after October 1, 2024; (iii) during the five consecutive business-day period immediately following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.25% 2025 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; or (iv) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.25% 2025 Debentures. We may not redeem the 1.25% 2025 Debentures prior to the maturity date. If we undergo a fundamental change or non-stock change of control (as described in the indenture for the 1.25% 2025 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.25% 2025 Debentures to be purchased plus any accrued and unpaid interest.

During the second quarter of fiscal year 2020, we repurchased $87.3 million notional amount of our 1.25% 2025 Debentures for $112.3 million, of which we allocated $72.8 million to debt and $39.5 million to equity based upon ASC 470-20. Also, in connection with the repurchases, we wrote off $16.7 million of unamortized discount and $0.7 million of unamortized costs. As a result, we recorded a $2.8 million loss associated with the repurchases. Following the repurchases, $262.7 million in aggregate principal amount of the 1.25% 2025 Debentures remains outstanding.

The 1.25% 2025 Debentures were convertible as of March 31, 2021, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending March 31, 2021. As a result, the holders of our 1.25% 2025 Debentures have the right to convert all or any portion of their debentures between April 1, 2021 and June 30, 2021. The holders previously had the right to convert all or any portion of their debentures at the aforementioned conversion ratio beginning October 1, 2020 through March 31, 2021. As of March 31, 2021, the net carrying amount of the 1.25% 2025 Debentures was included within the current portion of long-term debt, and $42.4 million has been reclassified from permanent equity to mezzanine equity. As of March 31, 2021, the if-converted value of the 1.25% 2025 Debentures exceeded its principal amount by $319.6 million.

1.50% Convertible Debentures due 2035

In June 2015, we issued $263.9 million in aggregate principal amount of 1.5% Senior Convertible Debentures due in 2035 in exchange for $256.2 million in aggregate principal amount of our 2.75% 2031 Debentures. Total proceeds, net of issuance costs, were $253.2 million. The 1.5% 2035 Debentures were issued at 97.09% of the principal amount, which resulted in a discount of $7.7 million. The 1.5% 2035 Debentures bear interest at 1.5% per year, payable in cash semi-annually in arrears. In addition to ordinary interest and default additional interest, beginning with the semi-annual interest period commencing on November 1, 2021, contingent interest will accrue during any regular semi-annual interest period where the average trading price of our 1.5% 2035 Debentures for the ten trading day period immediately preceding the first day of such semi-annual period is greater than or equal to $1,200 per $1,000 principal amount of our 1.5% 2035 Debentures, in which case, contingent interest will accrue at a rate of 0.50% per annum of such average trading price. The 1.5% 2035 Debentures mature on November 1, 2035, subject to the right of the holders to require us to redeem the 1.5% 2035 Debentures on November 1, 2021, 2026, or 2031. The 1.5% 2035 Debentures are general senior unsecured obligations and rank equally in right of payment with all of our existing and future unsecured, unsubordinated indebtedness and senior in right of payment to any indebtedness that is contractually subordinated to the 1.5% 2035 Debentures. The 1.5% 2035 Debentures will be effectively subordinated to indebtedness and other liabilities of our subsidiaries.

We account separately for the liability and equity components of the 1.5% 2035 Debentures in accordance with authoritative guidance for convertible debt instruments that may be settled in cash upon conversion. At issuance, we allocated $208.6 million

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to long-term debt, and $55.3 million has been recorded as additional paid-in capital, which is being amortized to interest expense using the effective interest rate method through November 2021.

If converted, the principal amount of the 1.5% 2035 Debentures is payable in cash and any amounts payable in excess of the principal amount, will be paid in cash or shares of our common stock, at our election. The conversion of the 1.5% 2035 Debentures will be based upon a conversion ratio of 48.5216 common shares per $1,000 principal amount, subject to adjustments. Conversion is only allowed in the following circumstances and to the following extent: (i) prior to May 1, 2035, on any date during any fiscal quarter beginning after September 30, 2015 (and only during such fiscal quarter) if the closing sale price of our common stock was more than 130% of the then current conversion price for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter; (ii) during the five consecutive business-day period following any five consecutive trading-day period in which the trading price for $1,000 principal amount of the 1.5% 2035 Debentures for each day during such five trading-day period was less than 98% of the closing sale price of our common stock multiplied by the then current conversion rate; (iii) upon the occurrence of specified corporate transactions, as described in the indenture for the 1.5% 2035 Debentures; or (iv) at the option of the holder at any time on or after May 1, 2035. Additionally, we may redeem the 1.5% 2035 Debentures, in whole or in part, on or after November 5, 2021 for cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures to be purchased plus any accrued and unpaid interest, including any additional interest to, but excluding, the repurchase date. Each holder shall have the right, at such holder’s option, to require us to repurchase all or any portion of the 1.5% 2035 Debentures held by such holder on November 1, 2021, November 1, 2026, or November 1, 2031 at par plus accrued and unpaid interest. If we undergo a fundamental change (as described in the indenture for the 1.5% 2035 Debentures) prior to maturity, holders will have the option to require us to repurchase all or any portion of their debentures for cash at a price equal to 100% of the principal amount of the 1.5% 2035 Debentures to be purchased plus any accrued and unpaid interest.

During the second quarter of fiscal year 2020, we repurchased $36.5 million notional amount of 1.5% 2035 Debentures for $41.3 million, of which we allocated $34.7 million to debt and $6.6 million to equity based upon ASC 470-20. Also, in connection with the repurchases, we wrote off $2.5 million of unamortized discount and $0.1 million of unamortized costs. As a result, we recorded a $0.8 million loss associated with the repurchases. Following the repurchases, $227.4 million in aggregate principal amount of the 1.5% 2035 Debentures remains outstanding.

The 1.5% 2035 Debentures were convertible as of March 31, 2021, as our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for at least 20 trading days during the 30 consecutive trading days ending March 31, 2021. As a result, the holders of our 1.5% 2035 Debentures have the right to convert all or any portion of their debentures between April 1, 2021 and June 30, 2021. The holders previously had the right to convert all or any portion of their debentures at the aforementioned conversion ratio beginning October 1, 2020 through March 31, 2021. As of March 31, 2021, the net carrying amount of the 1.5% 2035 Debentures was included within the current portion of long-term debt, and $5.9 million has been reclassified from permanent equity to mezzanine equity. As of March 31, 2021, the if-converted value of the 1.5% 2035 Debentures exceeded its principal amount by $254.1 million. Subsequent to the balance sheet date, holders of our 1.5% 2035 Debentures submitted conversion notices with a total value of approximately $118.3 million.

Revolving Credit Facility

On July 31, 2020, we amended our revolving credit agreement (the "Amended Revolving Credit Agreement") to, among other things, extend the expiration from April 15, 2021 to April 15, 2022. The Amended Revolving Credit Agreement provided for aggregate borrowing commitments of $242.5 million (the "Revolving Credit Facility"), including the revolving facility loans, the swingline loans and issuance of letters of credit. The borrowing outstanding under the Revolving Credit Facility bore interest at either (i) LIBOR plus an applicable margin of 1.50% or 1.75%, or (ii) the alternative base rate plus an applicable margin of 0.50% or 0.75%. The Revolving Credit Facility was secured by substantially all our assets. The Revolving Credit Agreement contained customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. At any time that there were any outstanding borrowings (excluding up to $25,000,000 of issued and undrawn Letters of Credit) under the Revolving Credit Facility, we were required to maintain a Consolidated Senior Secured Leverage Ratio (as defined in the Revolving Credit Agreement) not exceeding 4.00 to 1.00.

On February 4, 2021, we entered into a new revolving credit agreement (the "New Revolving Credit Agreement"), which replaced the existing Amended Revolving Credit Agreement. The New Revolving Credit Agreement expires February 4, 2026, and has an aggregate borrowing commitment of $300.0 million, including revolving loans and letters of credit (the "New Revolving Credit Facility"). The New Revolving Credit Facility bears interest at either (i) LIBOR plus an applicable margin of 1.50% or 1.75%, or (ii) the alternative base rate plus an applicable margin of 0.50% or 0.75%. The New Revolving Credit

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Facility is secured by substantially all our assets and substantially all assets of certain of our domestic subsidiaries that guarantee our obligations under the New Revolving Credit Agreement. The New Revolving Credit Agreement contains customary affirmative and negative covenants and conditions to borrowing, as well as customary events of default. Among other things, we are required to maintain a Consolidated Senior Secured Leverage Ratio (as defined in the New Revolving Credit Agreement) not exceeding 4.00 to 1.00. We were in compliance with all the debt covenants as of March 31, 2021.

As of March 31, 2021, after taking into account the outstanding letters of credit of $2.2 million, we had $297.8 million available for borrowing under the New Revolving Credit Facility.

12. Stockholders' Equity

Share Repurchases

On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved an additional $500.0 million under our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases are subject to our assessment of the prevailing market conditions, general economic conditions, capital allocation alternatives, and other factors.

We did not repurchase any shares of our common stock for the three and six months ended March 31, 2021. We repurchased 3.8 million shares of our common stock for $76.8 million for the three months ended March 31, 2020 and 9.5 million shares of our common stock for $169.2 million for the six months ended March 31, 2020. The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased 73.8 million shares for $1,238.8 million. As of March 31, 2021, approximately $261.2 million remained available for future repurchases under the program.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

13. Net Income (Loss) Per Share

The following table sets forth the computation for basic and diluted net income (loss) per share (in thousands, except per share amounts): 

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
Numerator:
Net income (loss) from continuing operations	$	12,734	$	(26,483)	$	19,688	$	17,141
Net (loss) income from discontinued operations	(16,368)		6,477		(8,427)		11,538
Net (loss) income	$	(3,634)	$	(20,006)	$	11,261	$	28,679
Denominator:
Weighted average common shares outstanding — basic	285,284		282,576		284,545		283,366
Dilutive effect of convertible instruments	27,041		—		24,339		—
Dilutive effect of employee stock compensation plans(a)	7,787		—		8,276		4,848
Weighted average common shares outstanding — diluted	320,112		282,576		317,160		288,214
Net income (loss) per common share - basic:
Continuing operations	$	0.04	$	(0.09)	$	0.07	$	0.06
Discontinued operations	(0.05)		0.02		(0.03)		0.04
Total net (loss) income per basic common share	$	(0.01)	$	(0.07)	$	0.04	$	0.10
Net income (loss) per common share - diluted:
Continuing operations	$	0.04	$	(0.09)	$	0.06	$	0.06
Discontinued operations	(0.05)		0.02		(0.03)		0.04
Total net (loss) income per diluted common share	$	(0.01)	$	(0.07)	$	0.03	$	0.10
Anti-dilutive equity instruments excluded from the calculation	38		73		19		39
Contingently issuable awards excluded from the calculation	—		2,113		—		1,706

(a)Certain performance-based awards were excluded from the determination of dilutive net income (loss) per share as the conditions were not met at the end of the reporting period.

14. Stock-Based Compensation

On January 22, 2020, our shareholders adopted our 2020 Stock Plan (the "2020 Stock Plan"). The 2020 Stock Plan (i) grants the Company's compensation committee the discretionary authority over the plan; (ii) makes employees, directors, consultants, and advisors of the Company and its subsidiaries eligible to receive awards; (iii) sets the number of shares of common stock that may be issued in satisfaction of awards to be 9,000,000 shares, plus the number of shares available for issuance under the amended and restated 2000 Stock Plan (the "Amended and Restated 2000 Stock Plan"); and (iv) identifies the annual limits on shares granted to each individual and the types of awards permissible.

As of March 31, 2021, we had 11.4 million shares available for future grants under the 2020 Stock Plan and the Amended and Restated 2000 Stock Plan. We recognize stock-based compensation expenses over the requisite service periods. Our share-based awards are classified within equity upon issuance.

The amounts included in the consolidated statements of operations related to stock-based compensation are as follows (dollars in thousands): 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
Cost of hosting and professional services	$	6,842	$	5,800	$	13,405	$	10,777
Cost of product and licensing	102		129		177		258
Cost of maintenance and support	419		447		845		840
Research and development	8,732		8,304		17,172		16,744
Sales and marketing	8,558		7,798		17,501		14,823
General and administrative	10,223		9,656		20,682		19,094
Total	$	34,876	$	32,134	$	69,782	$	62,536

Stock Options

The table below summarizes activities related to stock options for the six months ended March 31, 2021:

	Number of Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (a)
Outstanding at September 30, 2020	9,355	$	17.18
Outstanding at March 31, 2021	9,355	$	17.18	1.1 years	$	0.2	million
Exercisable at March 31, 2021	9,355	$	17.18	1.1 years	$	0.2	million
Exercisable at March 31, 2020	9,978	$	17.18	2.1 years	$	—	million

(a)The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of March 31, 2021 ($43.64) over the exercise price of the underlying options.

The aggregate intrinsic values of stock options exercised during the six months ended March 31, 2021 and 2020 were de minimis.

Restricted Units

Restricted units are not included in issued and outstanding common stock until the units are vested and underlying shares are released. The purchase price for vested restricted units is $0.001 per share. The table below summarizes activities relating to restricted units for the six months ended March 31, 2021:

	Number of Shares Underlying Restricted Units — Performance-Based Awards	Number of Shares Underlying Restricted Units — Time-Based Awards
Outstanding at September 30, 2020	2,620,120	7,157,649
Granted	665,977	2,041,041
Earned/released	(301,870)	(3,125,292)
Forfeited	(137,340)	(242,360)
Outstanding at March 31, 2021	2,846,887	5,831,038
Weighted average remaining recognition period of outstanding Restricted Units	1.3 years	1.6 years
Unrecognized stock-based compensation expense of outstanding Restricted Units	$26.5 million	$75.3 million
Aggregate intrinsic value of outstanding Restricted Units (a)	$124.2 million	$254.5 million

(a)The aggregate intrinsic value in this table represents any excess of the closing market price of our common stock as of March 31, 2021 ($43.64) over the purchase price of the underlying restricted units.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the weighted-average grant-date fair value of restricted units granted, and the aggregate intrinsic value of restricted units vested during the periods noted is as follows: 

	Six Months Ended March 31,
	2021		2020
Weighted-average grant-date fair value per share	$	37.75	$	17.52
Total intrinsic value of shares vested (in millions)	$	133.6	$	106.4

Performance-based restricted units outstanding as of March 31, 2021 include performance goals based on total shareholder return relative to our peers during the performance period. The awards actually earned will be up to two hundred percent of the target number of the performance-based restricted units. Compensation expense is recorded ratably over the performance period of the award based on the grant date fair value as determined using a Monte Carlo simulation model. Below is a summary of key assumptions of the valuation:

	Six Months Ended March 31,
	2021	2020
Dividend yield	0.0%	0.0%
Expected volatility	34.95%	27.73% - 28.24%
Risk-free interest rate	0.21%	1.40% - 1.62%
Expected term (in years)	3.00	2.72 - 3.00

15. Income Taxes

The components of income (loss) before income taxes from continuing operations are as follows (dollars in thousands):

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
Domestic	$	11,893	$	(26,561)	$	6,898	$	(29,983)
Foreign	5,664		13,950		19,916		19,699
Income (loss) before income taxes	$	17,557	$	(12,611)	$	26,814	$	(10,284)

The components of provision (benefit) for income taxes from continuing operations are as follows (dollars in thousands):

	Three Months Ended March 31,						Six Months Ended March 31,
	2021			2020			2021			2020
Domestic	$	(1,615)		$	4,450		$	(4,507)		$	(38,695)
Foreign	6,438			9,422			11,633			11,270
Provision (benefit) for income taxes	$	4,823		$	13,872		$	7,126		$	(27,425)
Effective tax rate	27.5		%	(110.0)		%	26.6		%	266.7		%

The effective income tax rate is based upon the income for the year, the geographic mix of our income, the composition of the income in different countries, changes relating to valuation allowances and the potential tax consequences of resolving audits or other tax contingencies.

Our effective income tax rate was 27.5% for the three months ended March 31, 2021, compared to (110.0)% for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 differed from the U.S. federal statutory rate of 21.0% primarily due to the base erosion anti-abuse tax offset by a change in the valuation allowance in the United States. The effective tax rate for the three months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States and a foreign uncertain tax position reserve.

Our effective income tax rate was 26.6% for the six months ended March 31, 2021, compared to 266.7% for the six months ended March 31, 2020. The effective tax rate for the six months ended March 31, 2021 differed from the U.S. federal statutory rate of 21.0% primarily due to the base erosion anti-abuse tax offset by a change in the valuation allowance in the United States. The effective tax rate for the six months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Valuation Allowances

As of March 31, 2021 and September 30, 2020, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to maintain valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. The company continues to believe its negative evidence outweighs its positive evidence after considering recent profitability trends and the disposition of the medical transcription and EHR implementation businesses. The Company continues to evaluate all sources of domestic taxable income including both the reversal of existing deferred tax liabilities and the likelihood that we could sustain pretax profitability in the future. As of March 31, 2021, we believe that there is a reasonable possibility that within the next twelve months these sources of taxable income may become sufficient positive evidence to support a conclusion that a substantial portion of the domestic valuation allowance, excluding capital losses, could be released.

16. Commitments and Contingencies

Litigation and Other Claims

Similar to many companies in the software industry, we are involved in a variety of claims, demands, suits, investigations and proceedings that arise from time to time relating to matters incidental to the ordinary course of our business, including actions with respect to contracts, intellectual property, employment, benefits and securities matters. At each balance sheet date, we evaluate contingent liabilities associated with these matters in accordance with ASC 450 "Contingencies". If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgments are required for the determination of probability and the range of the outcomes, and the estimates are based only on the information available at the time. Due to the inherent uncertainties involved in claims, legal proceedings, and in estimating the losses that may arise, actual outcomes may differ from our estimates. Contingencies deemed not probable or for which losses were not estimable in one period may become probable, or losses may become estimable in later periods which may have a material impact on our results of operations and financial position. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise our estimates. As of March 31, 2021, accrued losses were not material to our condensed consolidated financial statements, and we do not expect any pending matter to have a material impact on our condensed consolidated financial statements.

Guarantees and Other

We include indemnification provisions in the contracts we enter into with customers and business partners. Generally, these provisions require us to defend claims arising out of our products’ infringement of third-party intellectual property rights, breach of contractual obligations and/or unlawful or otherwise culpable conduct. The indemnity obligations generally cover damages, costs and attorneys’ fees arising out of such claims. In most, but not all cases, our total liability under such provisions is limited to either the value of the contract or a specified, agreed upon amount. In some cases, our total liability under such provisions is unlimited. In many, but not all cases, the term of the indemnity provision is perpetual. While the maximum potential amount of future payments we could be required to make under all the indemnification provisions is unlimited, we believe the estimated fair value of these provisions is minimal due to the low frequency with which these provisions have been triggered.

We indemnify our directors and officers to the fullest extent permitted by Delaware law, which provides among other things, indemnification to directors and officers for expenses, judgments, fines, penalties and settlement amounts incurred by such persons in their capacity as a director or officer of the company, regardless of whether the individual is serving in any such capacity at the time the liability or expense is incurred. Additionally, in connection with certain acquisitions, we agreed to indemnify the former officers and members of the boards of directors of those companies, on similar terms as described above, for a period of six years from the acquisition date. In certain cases, we purchase director and officer insurance policies related to these obligations, which fully cover the six-year period. To the extent that we do not purchase a director and officer insurance policy for the full period of any contractual indemnification, and such directors and officers do not have coverage under separate insurance policies, we would be required to pay for costs incurred, if any, as described above.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

17. Operating Leases

Operating Leases

We have various operating leases for office space, data centers, office equipment and automobiles around the world with lease terms expiring between 2021 and 2030.

We determine if an arrangement is a lease at inception. The current portion of our operating lease liabilities is included in accrued expenses and other current liabilities and the long-term portion is included in operating lease liabilities.

Operating lease assets and liabilities are recognized at the present value of the future lease payments at the lease commencement date. The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate. Due to the interest rate implicit in most of our leases not being readily determinable, our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments, and in economic environments where the leased asset is located. Operating lease assets also include any prepaid lease payments and lease incentives. Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease expense is recognized on a straight-line basis over the lease term.

Our lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. We combine fixed payments for non-lease components with our lease payments and account for them together as a single lease component which increases the amount of our lease assets and liabilities. Payments under our lease arrangements are primarily fixed. Variable rents, if any, are expensed as incurred.

As of March 31, 2021, our operating leases had a weighted average remaining lease term of 4.4 years and a weighted average discount rate of 3.8%. 

Future lease payments under operating leases as of March 31, 2021 were as follows (dollars in thousands):

Fiscal Year	Operating Leases		Operating leases under restructuring		Total
2021	$	13,177	$	2,436	$	15,613
2022	22,962		4,086		27,048
2023	16,343		3,707		20,050
2024	14,059		2,271		16,330
2025	10,483		1,346		11,829
Thereafter	43,510		1,843		45,353
Total	$	120,534	$	15,689	$	136,223

As of March 31, 2021, we have subleased certain office space that is included in the above table to third parties. As of March 31, 2021, the aggregate sublease income to be recognized during the remaining lease terms is $11.0 million, with approximately an average of $1.8 million annually for each of the next five fiscal years and approximately $2.2 million thereafter.

Our operating lease cost was approximately $6.9 million and $14.1 million for the three and six months ended March 31, 2021, respectively, and $7.7 million and $15.5 million for the three and six months ended March 31, 2020, respectively. Operating lease payments included within operating cash flows were $6.9 million and $14.6 million for the three and six months ended March 31, 2021, respectively, and $8.5 million and $16.1 million for the three and six months ended March 31, 2020, respectively.

18. Segment and Geographic Information

Our Chief Operating Decision Maker ("CODM") regularly reviews segment revenues and segment profits for performance evaluation and resources allocation. Segment revenues include certain acquisition-related adjustments for revenues that would otherwise have been recognized without the acquisition. Segment profits reflect controllable costs directly related to each segment and the allocation of certain corporate expenses such as corporate sales and marketing expenses and research and development project costs that benefit multiple segments. Certain items such as stock-based compensation, amortization of intangible assets, acquisition-related costs, net, restructuring and other charges, net, other expenses, net and certain unallocated

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

corporate expenses are excluded from segment profits, which allow for more meaningful comparisons to the financial results of the historical operations for performance evaluation and resources allocation by our CODM.

•The Healthcare segment is primarily engaged in providing clinical speech and clinical language understanding solutions that improve the clinical documentation process, from capturing the complete patient record to improving clinical documentation and quality measures for reimbursement.

•The Enterprise segment is primarily engaged in using speech, natural language understanding, and artificial intelligence to provide automated customer solutions and services for voice, mobile, web and messaging channels.

•The Other segment consists primarily of voicemail transcription services.

As more fully described in Note 4, on November 17, 2020, we entered into the Agreement to sell the Business, comprised of our medical transcription and EHR implementation businesses. Effective the first quarter of fiscal year 2021, the results of operations of the Business are included within discontinued operations for all periods presented. Our Healthcare segment revenue and segment profit for the historical periods have been recast to reflect the forementioned change.

We do not track our assets by segment. Consequently, it is not practical to show assets or depreciation by segment. The following table presents segment results along with a reconciliation of segment profit to Income (loss) before income taxes (dollars in thousands): 

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
Segment revenues:
Healthcare	$	211,892	$	170,982	$	411,224	$	384,792
Enterprise	129,997		137,445		269,149		275,918
Other	5,088		7,709		12,357		17,024
Total segment revenues	$	346,977	$	316,136	$	692,730	$	677,734
Less: acquisition-related revenues adjustments	—		(212)		—		(301)
Total revenues	$	346,977	$	315,924	$	692,730	$	677,433
Segment profit:
Healthcare	$	85,226	$	53,276	$	160,038	$	126,990
Enterprise	32,627		38,043		74,095		79,810
Other	2,429		3,833		7,400		8,948
Total segment profit	$	120,282	$	95,152	$	241,533	$	215,748
Corporate expenses and other, net	(25,723)		(28,671)		(56,838)		(59,119)
Acquisition-related revenues	—		(212)		—		(301)
Stock-based compensation	(34,876)		(32,134)		(69,782)		(62,536)
Amortization of intangible assets	(15,683)		(15,087)		(30,476)		(30,845)
Acquisition-related costs, net	(1,669)		(1,678)		(1,994)		(2,898)
Restructuring and other charges, net	(2,479)		(6,176)		(11,045)		(12,859)
Other expenses, net	(22,295)		(23,805)		(44,584)		(57,474)
Income (loss) before income taxes	$	17,557	$	(12,611)	$	26,814	$	(10,284)

No country outside of the United States provided greater than 10% of our total revenues. Revenues, classified by the major geographic areas in which our customers are located, were as follows (dollars in thousands): 

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
United States	$	277,965	$	246,161	$	550,563	$	543,536
International	69,012		69,763		142,167		133,897
Total revenues	$	346,977	$	315,924	$	692,730	$	677,433

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

19. Supplemental Cash Flow Information

Cash paid for Interest and Income Taxes:

	Three Months Ended March 31,				Six Months Ended March 31,
	2021		2020		2021		2020
	(Dollars in thousands)
Interest paid	$	247	$	1,137	$	21,334	$	27,829
Income taxes paid	$	5,048	$	10,768	$	7,786	$	12,383

20. COVID-19 Pandemic

The novel coronavirus ("COVID-19") pandemic has disrupted economic markets, and the future economic impact, duration and spread of COVID-19 is still uncertain at this time. The COVID-19 pandemic adversely affected our results of operations and liquidity for fiscal year 2020, and may continue to adversely impact our business, results of operations, cash flows and financial condition. While we have not experienced significant disruptions to our ability to conduct business thus far as a result of the pandemic, we are currently conducting business with substantial modifications to employee travel, employee work locations, virtualization or cancellation of customer and employee events, and remote sales, implementation, and support activities, among other modifications.

The full extent to which the coronavirus pandemic will impact our business, operations, and financial results in the future will depend on numerous evolving factors and may not be accurately predicted at this time.

21. Subsequent Events

On April 11, 2021, we entered into the Merger Agreement with Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft has agreed to acquire Nuance for $56.00 per share in an all-cash transaction valued at approximately $19.7 billion, inclusive of Nuance's net debt. Pursuant to the Merger Agreement, following consummation of the Merger Nuance will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. The transaction is currently intended to close by December 31, 2021. Consummation of the Merger is subject to certain conditions, including the receipt of the necessary approval from our stockholders, the satisfaction of certain regulatory approvals and other customary closing conditions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis is intended to help the reader understand the results of operations and financial condition of our business. Management’s Discussion and Analysis is provided as a supplement to, and should be read in conjunction with, our condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements.

CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks, uncertainties and assumptions that, if they never materialize or if they prove incorrect, could cause our consolidated results to differ materially from those expressed or implied by such forward-looking statements. These forward-looking statements include predictions regarding:

•potential disruption to our business caused by the proposed acquisition of us by Microsoft;

•our ability to complete the Merger in a timely manner or at all;

•our future bookings, revenues, cost of revenues, research and development expenses, selling, general and administrative expenses, amortization of intangible assets and gross margin;

•our strategy relating to our segments;

•our programs to reduce costs and optimize processes;

•market trends;

•technological advancements;

•the potential of future product releases;

•our product development plans and the timing, amount and impact of investments in research and development;

•future acquisitions, divestitures and other strategic transactions, and anticipated benefits from such transactions;

•international operations and localized versions of our products; 

•the impact of the COVID-19 pandemic; and

•the conduct, timing and outcome of legal proceedings and litigation matters.

You can identify these and other forward-looking statements by the use of words such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential," "continue" or the negative of such terms, or other comparable terminology. Forward-looking statements also include the assumptions underlying or relating to any of the foregoing statements. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks described in Item 1A — "Risk Factors" and elsewhere in this Quarterly Report on Form 10-Q.

You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

OVERVIEW

Business Overview

We are a pioneer and leader in conversational and cognitive AI innovations that bring intelligence to everyday work and life. Our solutions and technologies can understand, analyze and respond to human language to increase productivity and amplify human intelligence. Our solutions are used by businesses in the healthcare, financial services, telecommunications and travel industries, among others. We see several trends in our markets, including (i) the growing adoption of cloud-based, connected services and highly interactive mobile applications, (ii) deeper integration of virtual assistant capabilities and services, and (iii) the continued expansion of our core technology portfolio including automated speech recognition, natural language

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understanding, semantic processing, domain-specific reasoning, dialog management capabilities, AI, and voice biometric speaker authentication. We report our business in three segments, Healthcare, Enterprise, and Other.

•Healthcare. Our healthcare segment provides intelligent systems that support a more natural and insightful approach to clinical documentation, freeing clinicians to spend more time caring for patients and helping care teams and health organizations drive meaningful financial and clinical outcomes. Our principal solutions include dragon medical cloud-based solutions ("Dragon Medical One"), computer assisted physician documentation, diagnostic imaging solutions, Nuance® Dragon Ambient eXperience™ ("DAX"), clinical documentation improvement and coding.

•Enterprise. Our Enterprise segment is a leading provider of AI-powered intelligent customer engagement solutions and services, which enable enterprises and contact centers to enhance and automate customer service and sales engagement. Our principal solutions include interactive voice responses solutions, intelligent engagement solutions and security & biometric solutions.

•Other. Our Other segment currently consists primarily of voicemail transcription services.

•Discontinued Operations. On November 17, 2020, we entered into a definitive agreement to sell the Business, comprised of our medical transcription and EHR implementation businesses. On March 1, 2021, we completed the sale of the Business and received proceeds of approximately $29.8 million, subject to certain customary post-closing adjustments. For all periods presented, the Businesses' results of operations have been included within discontinued operations in our condensed consolidated financial statements.

Acquisition of Nuance Communications, Inc. by Microsoft Corporation

On April 11, 2021, we entered into a Merger Agreement with Microsoft. Subject to the terms and conditions of the Merger Agreement, Microsoft has agreed to acquire Nuance for $56.00 per share in an all-cash transaction valued at approximately $19.7 billion, inclusive of Nuance's net debt. Pursuant to the Merger Agreement, following consummation of the Merger Nuance will be a wholly-owned subsidiary of Microsoft. As a result of the Merger, we will cease to be a publicly traded company. We have agreed to various customary covenants and agreements, including, among others, agreements to conduct our business in the ordinary course during the period between the execution of the Merger Agreement and the effective time of the Merger. We do not believe these restrictions will prevent us from meeting our debt service obligations, ongoing costs of operations, working capital needs, or capital expenditure requirements. If the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Microsoft a termination fee of $515.0 million (including in connection with our entry into an agreement with respect to a Superior Proposal, as defined in the Merger Agreement, if certain conditions are met). The consummation of the Merger remains subject to customary closing conditions including approval of the Merger Agreement by our stockholders, satisfaction of certain regulatory approvals and other customary closing conditions, but it is currently intended to close by December 31, 2021.

For additional information related to the Merger Agreement, please refer to the definitive proxy statement and other relevant materials in connection with the transaction that we will file with the SEC and which will contain important information about Nuance and the Merger.

Key Metrics

In evaluating the financial condition and operating performance of our business, management focuses on revenue, net income (loss), gross margins, operating margins, cash flow from operations, and changes in deferred revenue. A summary of key financial metrics for the six months ended March 31, 2021, as compared to the six months ended March 31, 2020, is as follows:

•Total revenues were $692.7 million for the six months ended March 31, 2021, as compared to $677.4 million for the six months ended March 31, 2020;

•Net income from continuing operations for the six months ended March 31, 2021 was $19.7 million, compared to net income from continuing operations of $17.1 million for the six months ended March 31, 2020;

•Gross margins for the six months ended March 31, 2021 were 62.7%, compared to 59.6% for the six months ended March 31, 2020;

•Operating margins for the six months ended March 31, 2021 were 10.3%, compared to 7.0% for six months ended March 31, 2020; and

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•Operating cash flows from continuing operations increased by $27.0 million to $142.5 million for the six months ended March 31, 2021, compared to $115.5 million for the six months ended March 31, 2020.

RESULTS OF OPERATIONS

Total Revenues

The following tables show total revenues by product type and by geographic location, based on the location of our customers, in dollars and percentage change (dollars in millions): 

	Three Months Ended March 31,				Dollar Change		Percent Change
	2021		2020
Hosting and professional services	$	198.0	$	182.1	$	15.8	8.7	%
Product and licensing	85.8		69.6		16.2		23.4	%
Maintenance and support	63.2		64.2		(1.0)		(1.6)	%
Total revenues	$	347.0	$	315.9	$	31.1	9.8	%
United States	$	278.0	$	246.2	$	31.8	12.9	%
International	69.0		69.8		(0.8)		(1.1)	%
Total revenues	$	347.0	$	315.9	$	31.1	9.8	%

	Six Months Ended March 31,				Dollar Change		Percent Change
	2021		2020
Hosting and professional services	$	393.8	$	356.1	$	37.7	10.6	%
Product and licensing	171.8		194.6		(22.7)		(11.7)	%
Maintenance and support	127.1		126.8		0.3		0.2	%
Total revenues	$	692.7	$	677.4	$	15.3	2.3	%
United States	$	550.6	$	543.5	$	7.0	1.3	%
International	142.2		133.9		8.3		6.2	%
Total revenues	$	692.7	$	677.4	$	15.3	2.3	%

The geographic split was 80% of total revenues in the United States and 20% internationally for the three months ended March 31, 2021, as compared to 78% of total revenues in the United States and 22% internationally for the three months ended March 31, 2020.

The geographic split was 79% of total revenues in the United States and 21% internationally for the six months ended March 31, 2021, as compared to 80% of total revenues in the United States and 20% internationally for the six months ended March 31, 2020.

Hosting and Professional Services Revenue

Hosting revenue primarily relates to delivering on-demand hosted services, such as medical transcription and automated customer care applications, over a specified term. Professional services revenue primarily consists of consulting, implementation and training services for customers. The following table shows hosting and professional services revenue, in dollars and as a percentage of total revenues (dollars in millions): 

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	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Hosting revenue	$	171.9		$	151.8		$	20.2	13.3	%
Professional services revenue	26.0			30.4			(4.3)		(14.3)	%
Hosting and professional services revenue	$	198.0		$	182.1		$	15.8	8.7	%
As a percentage of total revenue	57.1		%	57.7		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Hosting revenue	$	339.3		$	298.1		$	41.1	13.8	%
Professional services revenue	54.5			57.9			(3.4)		(5.9)	%
Hosting and professional services revenue	$	393.8		$	356.1		$	37.7	10.6	%
As a percentage of total revenue	56.8		%	52.6		%

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Hosting revenue for the three months ended March 31, 2021 increased by $20.2 million, or 13.3%, primarily due to a $25.4 million increase in Healthcare. Healthcare hosting revenue increased primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. As a percentage of total revenue, hosting revenue increased from 48.0% to 49.6% for the three months ended March 31, 2021.

Professional services revenue for the three months ended March 31, 2021 decreased by $4.3 million, or 14.3%, primarily due to a $3.0 million decrease in Enterprise. Enterprise professional services revenue decreased primarily due to a decrease in professional services related to the voice engagement suite of products. As a percentage of total revenue, professional services revenue decreased from 9.6% to 7.5% for the three months ended March 31, 2021.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

Hosting revenue for the six months ended March 31, 2021 increased by $41.1 million, or 13.8%, primarily due to a $48.0 million increase in Healthcare. Healthcare hosting revenue increased primarily due to the growth in our Dragon Medical Cloud solutions and our continued transition from a license model to a cloud based model. As a percentage of total revenue, hosting revenue increased from 44.0% to 49.0% for the six months ended March 31, 2021.

Professional services revenue for the six months ended March 31, 2021 decreased by $3.4 million, or 5.9%, primarily due to the decrease in professional services related to the voice engagement suite of products. As a percentage of total revenue, professional services revenue decreased from 8.6% to 7.9% for the six months ended March 31, 2021.

Product and Licensing Revenue

Product and licensing revenue primarily consist of sales and licenses of our technology. The following table shows product and licensing revenue, in dollars and as a percentage of total revenues (dollars in millions): 

	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Product and licensing revenue	$	85.8		$	69.6		$	16.2	23.4	%
As a percentage of total revenue	24.7		%	22.0		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Product and licensing revenue	$	171.8		$	194.6		$	(22.7)	(11.7)	%
As a percentage of total revenue	24.8		%	28.7		%

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Product and licensing revenue for the three months ended March 31, 2021 increased by $16.2 million, or 23.4%, primarily due to an $18.1 million increase in Healthcare. Healthcare product and licensing revenue increased primarily due to a non-strategic

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legacy term license contract. As a percentage of total revenue, product and licensing revenue increased from 22.0% to 24.7% for the three months ended March 31, 2021.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

Product and licensing revenue for the six months ended March 31, 2021 decreased by $22.7 million, or 11.7%, primarily due to a $19.0 million decrease in Healthcare. Healthcare product and licensing revenue decreased primarily due to a non-strategic legacy term license contract. Also contributing to the decrease is the continued transition from a license model to a cloud based model within our Healthcare segment. As a percentage of total revenue, product and licensing revenue decreased from 28.7% to 24.8% for the six months ended March 31, 2021.

Maintenance and Support Revenue

Maintenance and support revenue primarily consist of technical support and maintenance services. The following table shows maintenance and support revenue, in dollars and as a percentage of total revenues (dollars in millions): 

	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Maintenance and support revenue	$	63.2		$	64.2		$	(1.0)	(1.6)	%
As a percentage of total revenue	18.2		%	20.3		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Maintenance and support revenue	$	127.1		$	126.8		$	0.3	0.2	%
As a percentage of total revenue	18.3		%	18.7		%

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Maintenance and support revenue for the three months ended March 31, 2021 decreased by $1.0 million, or 1.6%, primarily driven by the continued transition from software sold with maintenance and support to cloud-based solutions in Healthcare. As a percentage of total revenue, maintenance and support revenue decreased from 20.3% to 18.2% for the three months ended March 31, 2021.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

Maintenance and support revenue for the six months ended March 31, 2021 increased by $0.3 million, or 0.2%, primarily due to an increased volume in digital engagement and security biometrics license transactions in Enterprise.

COSTS AND EXPENSES

Cost of Hosting and Professional Services Revenue

Cost of hosting and professional services revenue primarily consists of compensation for services personnel, outside consultants and overhead, as well as the hardware, infrastructure and communications fees that support our hosting solutions. The following table shows the cost of hosting and professional services revenue, in dollars and as a percentage of professional services and hosting revenue (dollars in millions): 

	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Cost of hosting and professional services revenue	$	106.0		$	100.4		$	5.6	5.6	%
As a percentage of professional services and hosting revenue	53.5		%	55.1		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Cost of hosting and professional services revenue	$	211.6		$	201.7		$	9.9	4.9	%
As a percentage of professional services and hosting revenue	53.7		%	56.7		%

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Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Cost of hosting and professional services revenue for the three months ended March 31, 2021 increased by $5.6 million, or 5.6%, primarily driven by increased employee headcount to support the continued growth and expansion of our cloud-based solutions. Gross margin increased by 1.6 percentage points primarily due to the growth in Dragon Medical cloud-based solution, which is margin accretive.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

Cost of hosting and professional services revenue for the six months ended March 31, 2021 increased by $9.9 million, or 4.9%, primarily driven by increased employee headcount to support the continued growth and expansion of our cloud-based solutions. Gross margin increased by 2.9 percentage points primarily due to the growth in Dragon Medical cloud-based solution, which is margin accretive.

Cost of Product and Licensing Revenue

Cost of product and licensing revenue primarily consists of material and fulfillment costs, manufacturing and operations costs and third-party royalty expenses. The following table shows the cost of product and licensing revenue, in dollars and as a percentage of product and licensing revenue (dollars in millions): 

	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Cost of product and licensing revenue	$	8.5		$	9.1		$	(0.6)	(6.9)	%
As a percentage of product and licensing revenue	9.9		%	13.1		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Cost of product and licensing revenue	$	22.9		$	43.0		$	(20.2)	(46.8)	%
As a percentage of product and licensing revenue	13.3		%	22.1		%

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Cost of product and licensing revenue for the three months ended March 31, 2021 decreased by $0.6 million, or 6.9%. Gross margin increased by 3.2 percentage points, primarily due to higher licensing revenue on relatively flat licensing costs in Enterprise.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

Cost of product and licensing revenue for the six months ended March 31, 2021 decreased by $20.2 million, or 46.8%. Gross margin increased by 8.8 percentage points year-over-year. The decrease in cost and increase in gross margin were primarily due to higher royalty costs related to a legacy term license transaction in Healthcare for the first quarter of fiscal year 2021.

Cost of Maintenance and Support Revenue

Cost of maintenance and support revenue primarily consists of compensation for product support personnel and overhead. The following table shows the cost of maintenance and support revenue, in dollars and as a percentage of maintenance and support revenue (dollars in millions): 

	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Cost of maintenance and support revenue	$	7.3		$	8.0		$	(0.7)	(9.3)	%
As a percentage of maintenance and support revenue	11.5		%	12.5		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Cost of maintenance and support revenue	$	14.8		$	15.9		$	(1.1)	(7.1)	%
As a percentage of maintenance and support revenue	11.6		%	12.5		%

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Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Cost of maintenance and support revenue for the three months ended March 31, 2021 decreased by $0.7 million, or 9.3%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margins increased by 1.0 percentage points primarily driven by higher margin on Dragon Medical maintenance and support services in Healthcare.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

Cost of maintenance and support revenue for the six months ended March 31, 2021 decreased by $1.1 million, or 7.1%, primarily due to the continued transition from license transactions with maintenance and support to cloud-based solutions in Healthcare. Gross margins increased by 0.9 percentage points primarily driven by higher margin on Dragon Medical maintenance and support services in Healthcare.

Research and Development Expense

Research and development ("R&D") expense primarily consists of salaries, benefits, and overhead relating to engineering staff as well as third party engineering costs. The following table shows R&D expense, in dollars and as a percentage of total revenues (dollars in millions): 

	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Research and development expense	$	59.5		$	56.1		$	3.4	6.1	%
As a percentage of total revenue	17.1		%	17.8		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Research and development expense	$	116.0		$	110.7		$	5.3	4.8	%
As a percentage of total revenue	16.7		%	16.3		%

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

R&D expense increased by $3.4 million, or 6.1%, primarily due to a higher employee headcount as we continued to invest in our core technologies to power new products and solutions.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

R&D expense increased by $5.3 million, or 4.8%, primarily due to a higher employee headcount as we continued to invest in our core technologies to power new products and solutions.

Sales and Marketing Expense

Sales and marketing expense include salaries and benefits, commissions, advertising, direct mail, public relations, tradeshow costs and other costs of marketing programs, travel expenses associated with our sales organization and overhead. The following table shows sales and marketing expense, in dollars and as a percentage of total revenues (dollars in millions): 

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	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Sales and marketing expense	$	70.3		$	70.2		$	0.2	0.2	%
As a percentage of total revenue	20.3		%	22.2		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Sales and marketing expense	$	135.7		$	136.0		$	(0.2)	(0.2)	%
As a percentage of total revenue	19.6		%	20.1		%

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

Sales and marketing expense for the three months ended March 31, 2021 increased by $0.2 million, or 0.2%, primarily due to our investment in sales force to support new products and solutions.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

Sales and marketing expense for the six months ended March 31, 2021 decreased by $0.2 million, or 0.2%, primarily due to lower traveling and entertainment expenses, mostly offset by our investment in sales force to support new products and solutions.

General and Administrative Expense

General and administrative ("G&A") expense primarily consists of personnel costs for administration, finance, human resources, general management, fees for external professional advisers including accountants and attorneys, and provisions for doubtful accounts. The following table shows G&A expense, in dollars and as a percentage of total revenues (dollars in millions): 

	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
General and administrative expense	$	35.8		$	38.0		$	(2.3)	(6.0)	%
As a percentage of total revenue	10.3		%	12.0		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
General and administrative expense	$	76.9		$	76.4		$	0.5	0.7	%
As a percentage of total revenue	11.1		%	11.3		%

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

G&A expense decreased by $2.3 million, or 6.0%, primarily driven by decreases in professional services costs due to our cost savings initiatives, and lower traveling and entertainment expenses.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

G&A expense increased by $0.5 million, or 0.7%, primarily driven by increases in compensation and professional services costs, offset in part by lower traveling and entertainment expenses.

Amortization of Intangible Assets

Amortization of acquired patents and technologies are included within cost of revenue and the amortization of acquired customer and contractual relationships, non-compete agreements, acquired trade names and trademarks, and other intangibles are included within Operating expenses. Customer relationships are amortized based upon the pattern in which the economic benefits of the customer relationships are expected to be realized. Other identifiable intangible assets are amortized on a straight-line basis over their estimated useful lives. Amortization expense was recorded as follows (dollars in millions): 

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	Three Months Ended March 31,				Dollar Change		Percent Change
	2021		2020
Cost of revenue	$	4.9	$	6.6	$	(1.6)	(24.8)	%
Operating expenses	10.8		8.5		2.2		26.1	%
Total amortization expense	$	15.7	$	15.1	$	0.6	4.0	%

	Six Months Ended March 31,				Dollar Change		Percent Change
	2021		2020
Cost of revenue	$	9.2	$	13.1	$	(3.9)	(30.0)	%
Operating expenses	21.3		17.7		3.6		20.1	%
Total amortization expense	$	30.5	$	30.8	$	(0.4)	(1.2)	%

The increases in the three months ended March 31, 2021 of total amortization of intangible assets was primarily due to the amortization of acquired technology assets from the recent acquisition. The decrease in six months ended March 31, 2021 of total amortization of intangible assets was primarily due to the certain intangible assets having been fully amortized or written off during fiscal year 2021.

Acquisition-Related Costs, Net

Acquisition-related costs include costs related to business and asset acquisitions. These costs consist of (i) transition and integration costs, including retention payments, transitional employee costs, earn-out payments, and other costs related to integration activities; (ii) professional service fees, including financial advisory, legal, accounting, and other outside services incurred in connection with acquisition activities, and disputes and regulatory matters related to acquired entities; and (iii) fair value adjustments to acquisition-related contingencies. A summary of the Acquisition-related cost, net is as follows (dollars in millions): 

	Three Months Ended March 31,				Dollar Change		Percent Change
	2021		2020
Transition and integration costs	$	1.1	$	1.4	$	(0.2)	(16.4)	%
Professional service fees	0.5		0.3		0.2		68.9	%
Total Acquisition-related costs, net	$	1.7	$	1.7	$	—	(0.5)	%

	Six Months Ended March 31,				Dollar Change		Percent Change
	2021		2020
Transition and integration costs	$	1.2	$	2.8	$	(1.6)	(57.0)	%
Professional service fees	0.8		0.1		0.7		887.3	%
Total Acquisition-related costs, net	$	2.0	$	2.9	$	(0.9)	(31.2)	%

The decrease in acquisition-related cost, net for the three and six months ended March 31, 2021, as compared to prior-year periods, was primarily due to overall reduced acquisition and integration activities as we focus on portfolio optimization and organizational simplification.

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Restructuring and Other Charges, Net

Restructuring and other charges, net include restructuring expenses together with other charges that are unusual in nature, are the result of unplanned events, or arise outside of the ordinary course of our business. While restructuring and other charges, net are excluded from segment profits, the table below presents the restructuring and other charges, net associated with each segment (dollars in thousands):

	Three Months Ended March 31,
	2021										2020
	Personnel		Facilities		Total Restructuring		Other Charges		Total		Personnel		Facilities		Total Restructuring		Other Charges		Total
Healthcare	$	702	$	114	$	816	$	—	$	816	$	353	$	248	$	601	$	—	$	601
Enterprise	82		2,732		2,814		—		2,814		233		213		446		—		446
Other	—		139		139		—		139		—		54		54		—		54
Corporate	323		18		341		(1,631)		(1,290)		683		883		1,566		3,509		5,075
Total	$	1,107	$	3,003	$	4,110	$	(1,631)	$	2,479	$	1,269	$	1,398	$	2,667	$	3,509	$	6,176

	Six Months Ended March 31,
	2021										2020
	Personnel		Facilities		Total Restructuring		Other Charges		Total		Personnel		Facilities		Total Restructuring		Other Charges		Total
Healthcare	$	3,334	$	681	$	4,015	$	—	$	4,015	$	1,629	$	1,775	$	3,404	$	—	$	3,404
Enterprise	1,264		5,204		6,468		—		6,468		1,537		718		2,255		—		2,255
Other	—		168		168		—		168		—		(311)		(311)		—		(311)
Corporate	1,298		21		1,319		(925)		394		1,016		351		1,367		6,144		7,511
Total	$	5,896	$	6,074	$	11,970	$	(925)	$	11,045	$	4,182	$	2,533	$	6,715	$	6,144	$	12,859

Fiscal Year 2021

For the six months ended March 31, 2021, we recorded restructuring charges of $12.0 million, which included $5.9 million related to the termination of approximately 79 employees and $6.1 million of charges related to closing certain idle facilities. Of these amounts, $4.1 million was recorded for the three months ended March 31, 2021, which included $1.1 million related to the termination of approximately 22 employees and $3.0 million charge related to closing certain idle facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction as we continue to evaluate the geographic footprint of our offices and facilities. We expect the remaining outstanding severance of $1.6 million to be substantially paid during fiscal year 2021, and the remaining $16.8 million lease payments to be made through fiscal year 2027, in accordance with the terms of the applicable leases.

Additionally, for the six months ended March 31, 2021, we recorded $0.9 million for professional service receipts related to other corporate initiatives, of which we recorded $1.6 million during the three months ended March 31, 2021.

Fiscal Year 2020

For the six months ended March 31, 2020, we recorded restructuring charges of $6.7 million, which included $4.2 million related to the termination of approximately 51 employees and $2.5 million related to certain restructuring facilities. Of these amounts, $2.7 million was recorded for the three months ended March 31, 2020, which included $1.3 million related to the termination of approximately 14 employees and $1.4 million related to certain restructuring facilities. These actions were part of our strategic initiatives focused on investment rationalization, process optimization and cost reduction.

Additionally, for the six months ended March 31, 2020, we recorded $4.2 million of costs related to the separation of our Automotive business and $2.0 million related to the impairment of a right-of-use asset of a restructuring facility, offset in part by a $0.1 million cash receipt from insurance claims related to a malware incident that occurred in the third quarter of fiscal year 2017 (the "2017 Malware Incident"). Of these amounts, we recorded $1.4 million costs related to the separation of our Automotive business, $2.0 million related to the impairment of a right-of-use asset of a restructuring facility, and a $0.1 million cash expense from insurance claims related to the 2017 Malware Incident for the three months ended March 31, 2020. The $2.0 million impairment charge for the three and six months ended March 31, 2020 was related to a restructuring facility as we re-assessed the timing and fees of the assumed sublease as a result of the COVID-19 pandemic.

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Other Income (Expense), Net

A summary is as follows (dollars in millions): 

	Three Months Ended March 31,				Dollar Change		Percent Change
	2021		2020
Interest income	$	0.2	$	1.5	$	(1.3)	(88.4)	%
Interest expense	(23.1)		(23.6)		0.6		(2.4)	%
Other income (expense), net	0.6		(1.7)		2.3		(134.5)	%
Total other expense, net	$	(22.3)	$	(23.8)	$	1.5	(6.3)	%

	Six Months Ended March 31,				Dollar Change		Percent Change
	2021		2020
Interest income	$	0.4	$	3.7	$	(3.3)	(89.1)	%
Interest expense	(46.1)		(47.4)		1.4		(2.9)	%
Other income (expense), net	1.1		(13.7)		14.8		(107.9)	%
Total other expense, net	$	(44.6)	$	(57.5)	$	12.9	(22.4)	%

Interest income for the three and six months ended March 31, 2021 decreased primarily due to lower yields and decreases in cash and marketable securities for the current year period.

Interest expense for the three and six months ended March 31, 2021 decreased as we repaid $300.0 million of the 2024 Senior Notes in October 2019. We also repurchased $123.8 million notional amounts of the 1.25% and 1.5% Convertible Debentures during the second quarter of fiscal year 2020.

Other income, net for the three and six months ended March 31, 2021 decreased primarily due to losses on redemption and repurchases of debt in the second quarter of fiscal year 2020.

Provision (Benefit) for Income Taxes

The following table shows the provision (benefit) for income taxes on continuing operations and the effective income tax rate (dollars in millions):

	Three Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Provision for income taxes	$	4.8		$	13.9		$	(9.0)	(65.2)	%
Effective income tax rate	27.5		%	(110.0)		%

	Six Months Ended March 31,						Dollar Change		Percent Change
	2021			2020
Provision (benefit) for income taxes	$	7.1		$	(27.4)		$	34.6	(126.0)	%
Effective income tax rate	26.6		%	266.7		%

The effective income tax rate is based upon the income for the year, the geographic mix of our income, the composition of the income in different countries, changes relating to valuation allowances and the potential tax consequences of resolving audits or other tax contingencies.

Our effective income tax rate was 27.5% for the three months ended March 31, 2021, compared to (110.0)% for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 differed from the U.S. federal statutory rate of 21.0% primarily due to the base erosion anti-abuse tax offset by a change in the valuation allowance in the United States. The effective tax rate for the three months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States and a foreign uncertain tax position reserve.

Our effective income tax rate was 26.6% for the six months ended March 31, 2021, compared to 266.7% for the six months ended March 31, 2020. The effective tax rate for the six months ended March 31, 2021 differed from the U.S. federal statutory

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rate of 21.0% primarily due to the base erosion anti-abuse tax offset by a change in the valuation allowance in the United States. The effective tax rate for the six months ended March 31, 2020 differed from the U.S. federal statutory rate of 21.0% primarily due to the valuation allowance on deferred tax assets in the United States.

Valuation Allowances

As of March 31, 2021 and September 30, 2020, we had a full valuation allowance against net domestic deferred tax assets and certain foreign deferred tax assets. We intend to maintain valuation allowances on these deferred tax assets until there is sufficient evidence to support the release of all or some portion of these allowances. A significant portion of our domestic deferred tax assets relate to U.S. net operating losses. The company continues to believe its negative evidence outweighs its positive evidence after considering recent profitability trends and the disposition of the medical transcription and EHR implementation businesses. The Company continues to evaluate all sources of domestic taxable income including both the reversal of existing deferred tax liabilities and the likelihood that we could sustain pretax profitability in the future. As of March 31, 2021, we believe that there is a reasonable possibility that within the next twelve months these sources of taxable income may become sufficient positive evidence to support a conclusion that a substantial portion of the domestic valuation allowance, excluding capital losses, could be released.

Net (Loss) Income from Discontinued Operations

Disposition of Our Medical Transcription and EHR Implementation businesses

On November 17, 2020, we entered into the Agreement to sell the Business, comprised of our medical transcription and EHR implementation businesses to Assured Healthcare Partners and Aeries Technology Group (together, the “Buyer”). Pursuant to the Agreement, we sold and transferred, and the Buyer purchased and acquired, (a) the shares of certain subsidiaries through which we operate a portion of the Business and (b) certain assets used in or related to the Business; and the Buyer assumed certain liabilities related to such assets of the Business, subject to certain exclusions and indemnities as set forth in the Agreement.

On March 1, 2021, we completed the sale of the Business and received approximately $29.8 million in cash, subject to post-closing finalization of the adjustments set forth in the Agreement. As a result, we recorded a loss of $12.5 million, which is included within net (loss) income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.

For all periods presented, the Businesses' results of operations have been included within discontinued operations in our condensed consolidated financial statements.

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SEGMENT ANALYSIS

The following table presents certain financial information about our operating segments (dollars in millions):

	Three Months Ended March 31,						Change		Percent Change
	2021			2020
Segment Revenues (a):
Healthcare	$	211.9		$	171.0		$	40.9	23.9	%
Enterprise	130.0			137.4			(7.4)		(5.4)	%
Other	5.1			7.7			(2.6)		(34.0)	%
Total segment revenues	$	347.0		$	316.1		$	30.8	9.8	%
Less: acquisition related revenues adjustments	—			(0.2)			0.2		(100.0)	%
Total revenues	$	347.0		$	315.9		$	31.1	9.8	%
Segment Profit:
Healthcare	$	85.2		$	53.3		$	32.0	60.0	%
Enterprise	32.6			38.0			(5.4)		(14.2)	%
Other	2.4			3.8			(1.4)		(36.6)	%
Total segment profit	$	120.3		$	95.2		$	25.1	26.4	%
Segment Profit Margin:
Healthcare	40.2		%	31.2		%	9.1
Enterprise	25.1		%	27.7		%	(2.6)
Other	47.7		%	49.7		%	(2.0)
Total segment profit margin	34.7		%	30.1		%	4.6

	Six Months Ended March 31,						Change		Percent Change
	2021			2020
Segment Revenues (a):
Healthcare	$	411.2		$	384.8		$	26.4	6.9	%
Enterprise	269.1			275.9			(6.8)		(2.5)	%
Other	12.4			17.0			(4.7)		(27.4)	%
Total segment revenues	$	692.7		$	677.7		$	15.0	2.2	%
Less: acquisition related revenues adjustments	—			(0.3)			0.3		(100.0)	%
Total revenues	$	692.7		$	677.4		$	15.3	2.3	%
Segment Profit:
Healthcare	$	160.0		$	127.0		$	33.0	26.0	%
Enterprise	74.1			79.8			(5.7)		(7.2)	%
Other	7.4			8.9			(1.5)		(17.3)	%
Total segment profit	$	241.5		$	215.7		$	25.8	12.0	%
Segment Profit Margin:
Healthcare	38.9		%	33.0		%	5.9
Enterprise	27.5		%	28.9		%	(1.4)
Other	59.9		%	52.6		%	7.3
Total segment profit margin	34.9		%	31.8		%	3.0

(a)Segment revenues differ from reported revenues due to certain revenue adjustments related to acquisitions that would otherwise have been recognized but for the purchase accounting treatment of the business combinations. These revenues are included to allow for more complete comparisons to the financial results of historical operations and in evaluating management performance.

Segment Revenues

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

•Healthcare segment revenue increased by $40.9 million, or 23.9%, driven primarily by the timing of non-strategic healthcare coding contract renewal with the government and growth in Dragon Medical cloud. Revenue from Dragon

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Medical cloud and DAX cloud-based solutions increased by $20.6 million, or 30.5%, to $88.2 million for the three months ended March 31, 2021 from $67.6 million for the three months ended March 31, 2020, primarily due to the continued market penetration and customer transition of Dragon Medical One.

•Enterprise segment revenue decreased by $7.4 million, or 5.4%, primarily due to the timing of licensing transactions.

•Other segment revenue decreased by $2.6 million, or 34.0%, as we continue to wind down our Other segment.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

•Healthcare segment revenue increased by $26.4 million, or 6.9%, driven primarily by growths in Dragon Medical cloud, offset in part by a decline in Coding business. Revenue from Dragon Medical cloud and DAX cloud-based solutions increased by $35.4 million, or 26.5%, to $168.8 million for the six months ended March 31, 2021 from $133.4 million for the six months ended March 31, 2020, primarily due to the continued market penetration and customer transition of Dragon Medical One.

•Enterprise segment revenue decreased by $6.8 million, or 2.5%, primarily due to the timing of licensing transactions.

•Other segment revenue decreased by $4.7 million, or 27.4%, as we continue to wind down our Other segment.

Segment Profit

Three Months Ended March 31, 2021 compared to Three Months Ended March 31, 2020

•Healthcare segment profit increased by $32.0 million, or 60.0%, primarily driven by revenue growth in Dragon Medical cloud and revenue increases in the Coding business due to timing of non-strategic term license contracts. Segment profit margin increased by 9.1 percentage points to 40.2%, primarily driven by the growth in our Dragon Medical cloud-based solution, which is margin accretive.

•Enterprise segment profit decreased by $5.4 million, or 14.2%, as lower segment revenue was only partially offset by lower cost of sales and sales expenses. The decrease in sales expense was primarily due to lower compensation costs and traveling and entertainment expenses. Segment profit margin decreased by 2.6 percentage points to 25.1%, primarily due to lower segment revenues, offset in part by cost savings in cost of sales and operating expenses.

•Other segment profit decreased by $1.4 million, or 36.6%, as we continue to wind down our Other segment. Segment profit margin decreased by 2.0 percentage points to 47.7%.

Six Months Ended March 31, 2021 compared to Six Months Ended March 31, 2020

•Healthcare segment profit increased by $33.0 million, or 26.0%, primarily driven by revenue growth in Dragon Medical cloud and revenue increases in the Coding business due to timing of non-strategic term license contracts. Segment profit margin increased by 5.9 percentage points to 38.9%, primarily driven by the growth in our Dragon Medical cloud-based solution, which is margin accretive.

•Enterprise segment profit decreased by $5.7 million, or 7.2%, as lower segment revenue was only partially offset by lower cost of sales and sales expenses. Segment profit margin decreased by 1.4 percentage points to 27.5%, primarily due to lower segment revenues, offset in part by cost savings in cost of sales and operating expenses.

•Other segment profit decreased by $1.5 million, or 17.3%, as we continue to wind down our Other segment. Segment profit margin increased by 7.3 percentage points to 59.9%.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

We had cash and cash equivalents and marketable securities of $414.4 million as of March 31, 2021, an increase of $42.1 million from $372.3 million as of September 30, 2020. Our working capital, defined as total current assets less total current liabilities from continuing operations, was $(803.8) million as of March 31, 2021, compared to $(256.5) million as of September 30, 2020. Our working capital included $1,065.2 million and $432.2 million convertible debt as of March 31, 2021 and September 30, 2020, respectively. As of March 31, 2021, we had $297.8 million available for borrowing under our revolving credit facility. On February 4, 2021, we entered into the New Revolving Credit Agreement, which replaced our existing Amended Revolving Credit Agreement. The New Revolving Credit Agreement expires February 4, 2026, and increases

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the aggregate borrowing commitments to $300.0 million. We believe that our existing sources of liquidity are sufficient to support our operating needs, capital requirements and any debt service requirements for the next twelve months.

Cash and cash equivalents and marketable securities held by our international operations totaled $54.0 million as of March 31, 2021 and $60.9 million as of September 30, 2020. We utilize a variety of financing strategies to ensure that our worldwide cash is available to meet our liquidity needs. We expect the cash held overseas to be permanently invested in our international operations, and our U.S. operation to be funded through its own operating cash flows, cash and marketable securities within the U.S., and if necessary, borrowing under our revolving credit facility.

Disposition of Our Medical Transcription and EHR Implementation Businesses

In connection with our ongoing comprehensive portfolio and business review, on November 17, 2020, we entered into a definitive agreement to sell our medical transcription and EHR implementation businesses.

On March 1, 2021, we completed the sale of the Business and received approximately $29.8 million in cash, subject to post-closing finalization of the adjustments set forth in the Agreement. As a result, we recorded a loss of $12.5 million, which is included within Net income from discontinued operations. There are a number of working capital and other adjustments under the Agreement and related ancillary agreements. We do not believe that post-closing working capital adjustments under the Agreement, if any, will have a material impact on our results of operations.

Convertible Debentures

During the second quarter of fiscal year 2021, our common stock price exceeded the conversion threshold price of 130% of the applicable conversion price per share for each of our convertible debentures for at least 20 trading days during the 30 consecutive trading days ending March 31, 2021. As a result, the holders of our 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures have the right to convert all or any portion of their debentures between April 1, 2021 and June 30, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. All three convertible notes with a total net book value of $1.07 billion was included within current liabilities as of March 31, 2021.

Should any holders elect to convert, the principal amount of the convertible debentures would be payable in cash, and any amount payable in excess of the principal amount would be paid in cash or shares of our common stock at our election. Although the holders of our 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures previously had the right to convert their debentures between January 1, 2021 and March 31, 2021 as our common stock price exceeded 130% of the applicable conversion price for these debentures for at least 20 trading days during the 30 consecutive trading days ending December 31, 2020, there were no material exercises of the conversion rights during the second quarter ended March 31, 2021. Subsequent to the balance sheet date, holders of our 1.5% 2035 Debentures submitted conversion notices with a total value of approximately $118.3 million.

Our convertible debentures are actively traded in the open market. The 1.25% 2025 Debentures trade at a price consistently in excess of their conversion values. Therefore, we believe that it is uneconomic, and thus unlikely, for the holders of the 1.25% 2025 Debentures to early exercise their conversion rights. In the event that holders of any of our debentures presented an amount for settlement that exceeded our then available sources of liquidity, we may need to obtain additional financing, which we believe would be available to us based upon our assessment of the prevailing market and business conditions and our experience of successful capital raising activities.

Net Cash Provided by Operating Activities

Cash provided by operating activities for the six months ended March 31, 2021 was $149.6 million, an increase of $8.2 million from $141.4 million cash provided for the six months ended March 31, 2020. The increase was primarily due to:

•An increase of $24.2 million in cash provided due to favorable changes in working capital, primarily due to the timing of cash collections and cash payments; and

•An increase of $28.4 million in cash provided due to higher income before non-cash charges; offset in part by,

•A decrease of $25.6 million in cash provided from changes in deferred revenue. Deferred revenue had a negative effect of $1.0 million on operating cash flows for the six months ended March 31, 2021, as compared to a positive effect of $24.6 million for the six months ended March 31, 2020; and

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•A decrease of $18.8 million in cash flows from discontinued operations.

Net Cash (Used in) Provided by Investing Activities

Cash used in investing activities for the six months ended March 31, 2021 was $68.0 million, a decrease of $114.2 million from $46.3 million cash provided for the six months ended March 31, 2020. The decrease was primarily due to:

•An increase of $1.5 million in cash used for capital expenditures; and

•An increase of $45.2 million in cash used for payments for business and asset acquisitions; and

•A decrease of $76.6 million in net proceeds from the sale and purchase of marketable securities and other investments; and

•A decrease of $0.8 million in cash provided by other investing activities; offset in part by,

•Net proceeds of $9.9 million from the sale of our medical transcription and EHR implementation businesses.

Net Cash Used in Financing Activities

Cash used in financing activities for the six months ended March 31, 2021 was $42.8 million, a decrease of $303.1 million from $345.9 million cash used for the six months ended March 31, 2020. The decrease was primarily due to:

•A decrease of $513.6 million in cash used for the repayment and redemption of debt; and

•A decrease of $169.2 million in cash used for share repurchases; offset in part by,

•A net contribution of $139.1 million from Cerence in connection with the spin-off of our Automotive business during the first quarter of fiscal year 2020; and

•A decrease of $230.0 million in proceeds from the revolving credit facility; and

•An increase of $12.5 million in cash used for payments for taxes related to net share settlement of equity awards.

Debt

For a detailed description of the terms and restrictions of the debt and revolving credit facility, see Note 11 to the accompanying condensed consolidated financial statements.

As of March 31, 2021, we were in compliance with all the debt covenants. We may from time to time, depending on market and business conditions, repurchase outstanding debt in the open market or by private negotiation. We expect to incur cash interest payments of approximately $20.8 million for the remainder of fiscal year 2021, based on the stated yields and the outstanding debt principals as of March 31, 2021. We expect to fund our debt service requirements through existing sources of liquidity and our operating cash flows.

Share Repurchase Program

On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved an additional $500.0 million under our share repurchase program. Under the terms of the share repurchase program, we have the ability to repurchase shares from time to time through a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated stock repurchase transactions, or any combination of such methods. The share repurchase program does not require us to acquire any specific number of shares and may be modified, suspended, extended or terminated by us at any time without prior notice. The timing and the amount of any purchases are subject to our assessment of the prevailing market conditions, general economic conditions, capital allocation alternatives, and other factors.

We did not repurchase any shares of our common stock for the three and six months ended March 31, 2021. We repurchased 3.8 million shares of our common stock for $76.8 million for the three months ended March 31, 2020 and 9.5 million shares of our common stock for $169.2 million for the six months ended March 31, 2020. The amount paid in excess of par value is recognized in additional paid in capital and these shares were retired upon repurchase. Since the commencement of the program, we have repurchased 73.8 million shares for $1,238.8 million. As of March 31, 2021, approximately $261.2 million remained available for future repurchases under the program.

Off-Balance Sheet Arrangements, Contractual Obligations

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Contractual Obligations

The following table outlines our contractual payment obligations (dollars in millions):

	Contractual Payments Due in Fiscal Year
Contractual Obligations	Total		Remainder of 2021		2022 and 2023		2024 and 2025		Thereafter
Convertible debentures (1)	$	1,166.5	$	1,166.5	$	—	$	—	$	—
Senior notes (2)	500.0		—		—		—		500.0
Interest payable on long-term debt (3)	195.8		20.8		71.6		61.2		42.2
Letters of credit (4)	2.2		2.2		—		—		—
Lease obligations and other liabilities:
Operating leases (5)	120.5		13.2		39.3		24.5		43.5
Operating leases under restructuring	15.6		2.4		7.8		3.6		1.8
Purchase commitments for inventory, property and equipment (6)	121.7		38.5		83.2		—		—
Total contractual cash obligations	$	2,122.3	$	1,243.6	$	201.9	$	89.3	$	587.5

(1)As of March 31, 2021, the holders have the right to convert all or any portion of the 1.25% 2025 Debentures, 1.5% 2035 Debentures, and 1.0% 2035 Debentures between April 1, 2021 and June 30, 2021. Additionally, the holders of the 1.5% 2035 Debentures will have the right to redeem the notes in November 2021. As a result, these convertible debentures were treated as if they were due in fiscal year 2021.

(2)The repayment schedule reflects all the senior notes outstanding as of March 31, 2021.

(3)Interest per annum is due and payable semi-annually and is determined based on the outstanding principal as of March 31, 2021, the stated interest rate of each debt instrument and the assumed redemption dates discussed above.

(4)Letters of credit are in place primarily to secure future operating lease payments.

(5)Obligations include contractual lease commitments related to facilities that have subsequently been subleased. As of March 31, 2021, we have subleased certain facilities with total sublease income of $11.0 million through fiscal year 2027.

(6)These amounts include non-cancelable purchase commitments for property and equipment as well as inventory in the normal course of business to fulfill customer backlog.

Total unrecognized tax benefits as of March 31, 2021 were $59.4 million. We do not expect any significant change in the amount of unrecognized tax benefits within the next twelve months.

Contingent Liabilities and Commitments

Certain acquisition payments to selling shareholders were contingent upon the achievement of predetermined performance target over a period of time after the acquisition. Such contingent payments were recorded at estimated fair values upon the acquisition and re-measured in subsequent reporting periods. As of March 31, 2021, we may be required to pay the selling stockholders up to $3.0 million upon achieving specified performance goals, including the achievement of future bookings and sales targets related to the products of the acquired entities. In addition, certain deferred compensation payments to selling shareholders contingent upon their continued employment after the acquisition was recorded as compensation expense over the requisite service period. Additionally, as of March 31, 2021, the remaining deferred payment obligations of $16.2 million to certain former stockholders, which are contingent upon their continued employment, will be recognized ratably as compensation expense over the remaining requisite service periods.

Off-Balance Sheet Arrangements

Through March 31, 2021, we have not entered into any off-balance sheet arrangements or material transactions with unconsolidated entities or other persons.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are included in the "Critical Accounting Policies" section of "Management’s Discussion and Analysis of Financial Condition and Results of Operations" included in the Form 10-K for the fiscal year ended September 30, 2020. There has been no material change to our critical accounting policies since September 30, 2020.

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RECENTLY ADOPTED ACCOUNTING STANDARDS AND ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED

See Note 2 to the accompanying condensed consolidated financial statements for a discussion of the recently adopted and issued accounting standards.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in foreign currency exchange rates, interest rates and equity prices which could affect operating results, financial position and cash flows. We manage our exposure to these market risks through our regular operating and financing activities and, when appropriate, through the use of derivative financial instruments.

Exchange Rate Sensitivity

We are exposed to changes in foreign currency exchange rates. Any foreign currency transaction, defined as a transaction denominated in a currency other than the local functional currency, will be reported in the functional currency at the applicable exchange rate in effect at the time of the transaction. A change in the value of the functional currency compared to the foreign currency of the transaction will have either a positive or negative impact on our financial position and results of operations.

Assets and liabilities of our foreign entities are translated into U.S. dollars at exchange rates in effect at the balance sheet date and income and expense items are translated at average rates for the applicable period. Therefore, the change in the value of the U.S. dollar compared to foreign currencies will have either a positive or negative effect on our financial position and results of operations. Historically, our primary exposure has related to transactions denominated in the euro, British pound, Brazilian real, Canadian dollar, and Indian rupee.

Periodically, we enter into forward exchange contracts to hedge against foreign exchange rate fluctuations. As of March 31, 2021, we had not designated any contracts as fair value or cash flow hedges. The contracts generally have a maturity of less than 90 days. As of March 31, 2021, the notional contract amount of outstanding foreign currency exchange contracts was $25.0 million.

Interest Rate Sensitivity

We are exposed to interest rate risk as a result of our cash and cash equivalents and marketable securities.

At March 31, 2021, we held approximately $414.4 million of cash and cash equivalents and marketable securities consisting of cash, money-market funds, bank deposits and a separately managed investment portfolio. Assuming a one percentage point increase in interest rates, our interest income on our investments classified as cash and cash equivalents and marketable securities would increase by approximately $4.1 million per annum, based on the balances of cash and cash equivalents and marketable securities as of March 31, 2021.

Convertible Debentures

The fair values of our convertible debentures are dependent on the price and volatility of our common stock as well as movements in interest rates. The fair market values of these debentures will generally increase as the market price of our common stock increases and will decrease as the market price of our common stock decreases. The fair market values of these debentures will generally increase as interest rates fall and decrease as interest rates rise. The market value and interest rate changes affect the fair market values of these debentures, but do not impact our financial position, results of operations or cash flows due to the fixed nature of the debt obligations. However, increases in the value of our common stock above the stated trigger price for each issuance for a specified period of time may provide the holders of these debentures the right to convert each bond using a conversion ratio and payment method as defined in the debenture agreement.

The following table summarizes the fair value and conversion value of our convertible debentures, and the estimated increase in fair value and conversion value with a hypothetical 10% increase in the stock price of $43.64 as of March 31, 2021 (dollars in millions):

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	March 31, 2021
	Fair value		Conversion value		Increase to fair value		Increase to conversion value
1.5% 2035 Debentures	$	482.3	$	481.5	$	47.2	$	48.1
1.0% 2035 Debentures	$	1,252.6	$	1,223.9	$	110.3	$	122.4
1.25% 2025 Debentures	$	597.7	$	582.2	$	52.8	$	58.2

Item 4.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures under the supervision of, and with the participation of, management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to meet the requirements of Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

Changes in Internal Control Over Financial Reporting

There have been no material changes in our internal controls over financial reporting during the three months ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

This information is included in Note 16, Commitments and Contingencies, in the accompanying notes to the unaudited condensed consolidated financial statements and is incorporated herein by reference from Item 1 of Part I.

Item 1A. Risk Factors

Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2020 sets forth information relating to important risks and uncertainties that could materially affect our business, financial condition or operating results. Those risk factors, in addition to the other information set forth in this report, continue to be relevant to an understanding of our business, financial condition and operating results for the three and six months ended March 31, 2021. There have been no material changes in our risk factors from those disclosed in our Annual Report, except as described below.

Risks Relating to the Merger

The announcement and pendency of the Merger may result in disruptions to our business.

On April 11, 2021, we entered into the Merger Agreement with Microsoft and Merger Sub, pursuant to which we will be acquired by Microsoft in an all-cash transaction. The Merger Agreement generally requires us to operate our business in the ordinary course pending consummation of the Merger and restricts us, without Microsoft’s consent, from taking certain specified actions until the Merger is completed. These restrictions may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows.

Further, in connection with the pending Merger, our current and prospective employees may experience uncertainty about their future roles with us following the Merger, which may materially adversely affect our ability to attract and retain key personnel

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while the Merger is pending. Key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with us following the Merger, and may depart prior to the consummation of the Merger. Accordingly, no assurance can be given that we will be able to attract and retain key employees to the same extent that we have been able to in the past.

The proposed Merger further could cause disruptions to our business or business relationships, which could have an adverse impact on our results of operations. Parties with which we have business relationships may experience uncertainty as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.

The pursuit of the Merger may place a significant burden on management and internal resources. It may also divert management’s time and attention from the day-to-day operation of our remaining businesses and the execution of our other strategic initiatives. This could adversely affect our financial results. In addition, we have incurred and will continue to incur other significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed Merger, and many of these fees and costs are payable regardless of whether or not the pending Merger is consummated.

Any of the foregoing could adversely affect our business, our financial condition and our results of operations and prospects.

The Merger may not be completed within the intended timeframe, or at all, and the failure to complete the Merger could adversely affect our business, results of operations, financial condition, and the market price of our common stock.

There can be no assurance that the Merger will be completed in the intended timeframe, or at all. The Merger Agreement contains a number of conditions that must be satisfied or waived prior to the completion of the Merger, including, among others, (i) adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of our common stock, (ii) the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (iii) the approval or clearance of the Merger under the antitrust and foreign investment laws of certain specified countries. There can be no assurance that all required approvals will be obtained or that all closing conditions will otherwise be satisfied (or waived, if applicable), and, if all required approvals are obtained and all closing conditions are satisfied (or waived, if applicable), we can provide no assurance as to the terms, conditions and timing of such approvals or that the Merger will be completed in a timely manner or at all. Many of the conditions to completion of the Merger are not within our control, and we cannot predict when or if these conditions will be satisfied (or waived, as applicable). Even if regulatory approval is obtained, it is possible conditions will be imposed that could result in a material delay in, or the abandonment of, the Merger or otherwise have an adverse effect on us.

If the Merger is not completed within the intended timeframe or at all, we may be subject to a number of material risks. The price of our common stock may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. In addition, some costs related to the Merger must be paid whether or not the Merger is completed, and we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other transaction costs in connection with the proposed transaction, as well as the diversion of management and resources towards the Merger, for which we will have received little or no benefit if completion of the Merger does not occur. We may also experience negative reactions from our investors, customers, partners, suppliers, and employees. In addition, if the Merger Agreement is terminated under certain specified circumstances, we will be required to pay Microsoft a termination fee of $515,000,000 (including in connection with our entry into an agreement with respect to a Superior Proposal, as defined in the Merger Agreement, if certain conditions are met).

Stockholder litigation could prevent or delay the closing of the pending Merger or otherwise negatively impact our business, operating results and financial condition.

We may incur additional costs in connection with the defense or settlement of any future stockholder litigation in connection with the pending Merger. Such litigation may adversely affect our ability to complete the pending Merger. We could incur significant costs in connection with any such litigation, including costs associated with the indemnification of obligations to our directors.

The Merger Agreement contains provisions that could discourage a potential competing acquirer.

Under the terms of the Merger Agreement, we have agreed not to solicit or encourage discussions with third parties regarding other proposals to acquire us and are subject to restrictions on our ability to respond to any such proposal, except as permitted

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under the terms of the Merger Agreement. In the event that we receive a bona fide written acquisition proposal from a third party that our Board of Directors concludes in good faith is a Superior Proposal, we must notify Microsoft of such proposal and negotiate in good faith with Microsoft prior to effecting a change in the recommendation of our Board of Directors to our stockholders with respect to the pending Merger. The Merger Agreement also contains certain termination rights for both parties and further provides that, upon termination of the Merger Agreement under specified circumstances, including certain terminations in connection with an alternative business combination transaction as permitted by the terms of the Merger Agreement, we will be required to pay Microsoft a $515.0 million termination fee.

These provisions could discourage a potential third-party acquirer that might have an interest in acquiring all or a significant portion of Nuance from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the Merger. These provisions also might result in a potential third-party acquirer proposing to pay a lower price to our stockholders than it might otherwise have proposed to pay due to the added expense of the termination fee that may become payable in certain circumstances.

If the Merger Agreement is terminated and we determine to seek another business combination, we may not be able to negotiate a transaction with another party on terms comparable to, or better than, the terms of the pending Merger.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following is a summary of our share repurchases for the three months ended March 31, 2021:

Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Program (1)	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1)
January 1, 2021 - January 31, 2021	—	—	—	$261.2 Million
February 1, 2021 - February 28, 2021	—	—	—	$261.2 Million
March 1, 2021 - March 31, 2021	—	—	—	$261.2 Million
Total	—		—

(1) On April 29, 2013, our Board of Directors approved a share repurchase program for up to $500.0 million, which was increased by $500.0 million on April 29, 2015. On August 1, 2018, our Board of Directors approved additional $500.0 million under our share repurchase program. As of March 31, 2021, approximately $261.2 million remained available for future repurchases under the program.

For the majority of restricted stock units granted to employees, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory income withholding tax requirements that we pay in cash to the applicable taxing authorities on behalf of our employees. We do not consider these transactions to be common stock repurchases.

Item 3.Defaults Upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

Item 6.Exhibits

The exhibits listed on the Exhibit Index are filed or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

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EXHIBIT INDEX

 

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith
2.1	Agreement and Plan of Merger Agreement, dated as of April 11, 2021, by and among Nuance Communications, Inc., Microsoft Corporation and Big Sky Merger Sub Inc.	8-K	000-27038	2.1	4/13/2021
3.1	Amended and Restated Certificate of Incorporation of the Registrant.	10-Q	000-27038	3.2	5/11/2001
3.2	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant.	10-Q	000-27038	3.1	8/9/2004
3.3	Certificate of Ownership and Merger.	8-K	000-27038	3.1	10/19/2005
3.4	Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Registrant, as amended.	S-3	333-142182	3.3	4/18/2007
3.5	Amended and Restated Bylaws of the Registrant.	10-K	001-36056	3.4	11/7/2019
3.6	Bylaws Amendment.	8-K	000-27038	3.1	4/13/2021
10.1	Revolving Credit Agreement, dated February 4, 2021, among Nuance Communications, Inc., the lenders party thereto, Barclays Bank PLC, as Administrative Agent, and the other parties named therein.	8-K	001-36056	10.1	2/8/2021
31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a).					X
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a).					X
32.1	Certification Pursuant to 18 U.S.C. Section 1350.					X
101	The following materials from Nuance Communications, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, formatted in XBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Loss, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.					X
104	The cover page of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 formatted in Inline XBRL (included in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Burlington, Commonwealth of Massachusetts, on May 10, 2021.

Nuance Communications, Inc.
By:	/s/ Daniel D. Tempesta
	Daniel D. Tempesta
	Executive Vice President and Chief Financial Officer

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